Focus on a Single Strategy?

Derek raises an important question at StockTwits University.  This little synopsis does not do it justice. Read the post.

"Anyone trading markets for a period of time knows that knowledge does
not translate into profits.  In fact, the illusion of knowledge has
broken some of the most intelligent participants including Long-Term
Capital Management… 

So should traders and
investors seek to expand their knowledge base, or focus on one strategy
they can repeat over and over?

…basing one’s livelihood on a
single mean reversion strategy is a sure way to the poorhouse in a
runaway bull or bear market.  If you’re going to nail down an edge, be
sure you have some way to measure when that “edge” has been taken away
by too many adherents or changing market conditions.

I think the essence of the discussion is brought together with this line from milktrader:

"It doesn’t hurt to be comprehensive in your knowledge and targeted in your approach""


Derek's comments hit home, and milktrader's summary makes the point clearly.

Knowledge is a good thing.  A better understanding of the concepts, the easier for the trader to understand how options are priced in the marketplace.  And that understanding provides a good estimate of how the Greeks change and thus, potential profits and losses. 

I always try to keep thing simple.  As Derek points out, the single-minded approach of trading iron condors, no matter what's going on in the market, is unwise.  I agree.  It's a comfortable strategy to trade, but risk is ever-present and I don't know if this strategy is a winner – as a stand alone strategy – over the longer term.

Fortunately, we are not forced to trade iron condors at all times, and other strategies can be adopted.  Those include iron condors with appropriate insurance.

As long as the condor trader does not believe this is a free-money methodology (do such people exist?), and makes a serious effort (because it is serious) to manage risk effectively, he/she ought to be able to handle the market's ups and downs.

However, the question remains:  Why stop there?  Why not expand your knowledge to other aspects of option trading.  There are new strategies to understand.  There is the important topic of skew, which makes a real world difference when using options.  I admit that this is a topic I've ignored at Options for rookies.

Bottom line:  I'm in agreement with both gentlemen quoted:  Learn.  Understand what you can about options.  Grow as a person and trader. It's okay to focus on trading a single strategy (most of the time) – especially when you are well-armed with knowledge that allows you to transform dangerous situations into opportunity.


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16 Responses to Focus on a Single Strategy?

  1. Jeff 09/15/2010 at 7:01 AM #

    I see a strong relationship between this post and your prior one (Beginners, Novices, Experts). It seems your expectation is that we should seek to have multiple options strategies in our arsenal and to be experts at all of them. Is that a realistic expectation?
    The implication in Derek’s comments favoring seeking to become an expert in a single strategy is on target for me. My most recent blog post provided my thoughts on this very topic.

  2. derek 09/15/2010 at 7:40 AM #

    Thanks for expanding, Mark. As an avid student, I can’t help but want to add new strategies to my arsenal. I’ve had to learn to break my day into segments in which I’ll abandon one hat and put on another…without this separation, time frame errors are way too easy to commit. I’m happy to have some noncorrelated strategies to lean upon, but without some automation there’s no way the brain(at least mine) is capable of operating on multiple fronts against focused experts in each style.

  3. Mark Wolfinger 09/15/2010 at 7:52 AM #

    No, it’s not realistic. I believe it’s best to learn and understand and be prepared to use more than one strategy. But two is probably sufficient for people who have been trading for a year or two.
    You want to be as ‘expert’ as possible in your primary choice – and especially knowing when it NOT an appropriate time to employ that strategy.
    If you drew that conclusion, then I was not clear. Spend your time finding your most comfortable, efficient, profitable strategy and use it. Most of the time. Having a backup is a good idea.
    For covered call writers, there is going to be a time when the safety of a collar may be preferred – for a short duration.
    Thanks Jeff and here is a link to your post.

  4. Mark Wolfinger 09/15/2010 at 7:58 AM #

    Hi Derek,
    The idea of ‘operating against experts’ does not frighten me.
    I believe there are so many traders, professional and otherwise, who are making such a huge number of trades that it’s unlikely I’m going to come into direct competition with someone who can take money from me.
    This is especially true when trading the high volume options. As someone who trades low volume, OTM, 2-3 month options, I don’t get to take advantage of that flurry of activity. But unless I price my trade poorly, I’m not concerned with ‘competition.’ If others are better or smarter than me (and they are), they will make more money. But I don’t see how they will take a noticeable amount of cash out of my pocket.

  5. Jorge 09/15/2010 at 9:03 AM #

    I agree Mark, low volume traders like me don’t need to worry about trading against experts. I am my only enemy. If I make the correct decisions I will make money, if I make the wrong decisions I will go broke. Of course, professionals may benefit from better spreads, but I cannot use that excuse if I lose money.

  6. Mark Wolfinger 09/15/2010 at 9:16 AM #

    Just be sure you understand this: ‘Correct’ decisions do not always turn out well. ‘Bad’ decisions are not always punished.
    That’s why it’s important to pay attention to statistics and probabilities.
    Good trading

  7. Rajesh 09/15/2010 at 9:35 AM #

    Hi Mark,
    Off topic but I was going through your double diagonals and was not able to glean guidelines as to how to open and manage the trade. For example, when (how many days out from your long / short strike expiration) do you put on the diagonal, how do you choose the short strike in the near month (your own criteria, if you will please!) and I read somewhere in your blog that you cover them when the delta of your long exceeds the delta of your short (making it more vulnerable to price moves against that leg). Also when you do take off one leg of the diagonal do you roll up the other leg (since it is very likely that it is now quite far away from the current price).

  8. Mark Wolfinger 09/15/2010 at 9:44 AM #

    Hello Rajesh,
    You are asking for a whole lesson on how to trade a specific strategy.
    I cannot supply that in the question and answer forum.
    I’ll try to address this is a future post (soon).
    For now: I do not cover them when the delta of the long exceeds the delta of the short. If you found that on my blog, I’d appreciate your providing a link so I can see the context of that statement.
    DD are managed similarly to IC, but there are enough differences to warrant additional discussion.
    Thanks and I’ll do what I can to get this done in a timely manner.

  9. Rajesh 09/15/2010 at 11:11 AM #

    Hi Mark,
    Thanks for the quick reply and I was hoping you would do a full post. Looking back at what I read
    Delta risk: If the underlying stock or index moves so that your options are farther out of the money (we are only discussing one half of the double diagonal spreads; not both sides simultaneously), as soon as the delta of your long exceeds the delta of your short, your spread declines in value – and a portion (all?) of your profits can disappear. When looking at a call spread, it’s bad enough to lose money when the stock surges through the strike price of your short options, but you don’t want to see your profits disappear when the stock declines. At some point, it a good idea to close the trade and keep what you have earned. Remember, profits that are in your account today represent your money.

    Well I put two and two together so that if the profits if any are going to disappear when the delta of the long exceeds the delta of the short, then that must be a good time to close the position.
    Of course, you have not categorically stated as such but I am very keen to hear your thoughts (hopefully in the usual detailed format!)
    Thanks again

  10. Mark Wolfinger 09/15/2010 at 11:46 AM #

    Yes, there is a point at which the far OTM portion of the DD reaches its maximum profit potential (for a given date).
    You do want to exit at, or near, that point.

  11. Steve 09/16/2010 at 11:30 AM #

    This is a great topic. While reading the post one of the first thoughts that came to my mind is “jack of all trades master of none.” I think in today’s society as a whole specialism is becoming obsolete. We want to consolidate everything. Look on further than cell phones. Why would I need a cell phone plus a laptop plus an IPOD when I can get all in 1? The more 1 item can do, the more marketable it is.
    Does that translate into trading? I think in some instances it can, but not necessarily. Every successful trader will tell you that one of the big keys to being successful, is confidence in your system and your plan. In order to gain that confidence the plan/strategy must be perfected. However, we all know the market does not always do what we want it to or what we expect it to. So we must be able to adjust to what the market does. I think milktrader is spot on.

  12. Mark Wolfinger 09/16/2010 at 12:20 PM #

    Steve B (too many Steves)
    Bottom line is that it’s an individual decision. However, it is best when the decision to specialize is based on something concrete.
    For example, ‘confidence’ comes from making money. But, it should really come from understanding what you are trading and knowing why you are making money. Many times it’s merely ‘good luck’ – and that should not be a confidence booster.
    Specialization has a great many advantages, but some flexibility must remain.

  13. derek 09/16/2010 at 3:19 PM #

    I don’t think you should be concerned with “experts”, as you are one. The example is more apt of me stepping into your expertise of iron condors and assuming I will achieve results as tested/promised. Without living through it, I have no way of knowing if/when I’ll fail the first risk management test I face.
    My point is simply that there is a learning curve for which we must account, and the successful operator has a huge edge over me when I tread on his territory. The transition from solid directional idea into a well-structured options play is but one example…the options “expert”(bad term) knows the greeks, and the stock guy is speculating on direction. Initially a recipe for suboptimal results, at best, and disaster at worst if IV not properly factored.

  14. Mark Wolfinger 09/16/2010 at 3:34 PM #

    Hello Derek,
    I agree that facing the unknown of how any trader will fare as a risk manager is a big deal. That’s why practice is valuable.
    All you have to do is trade your portfolio. If there are thousands of experts with similar positions and if each of them is trying to make an adjustment at the same time, and if the options are thinly traded – and that’s a lot of ‘ifs’ – then you are at disadvantage.
    But I never worry about what someone else is doing. I’m trying to trade with the market makers and they either take the other side of my trade or they don’t.
    If they don’t take my trade, I can either bend on the price or be stupid (some prefer the word ‘stubborn’). When getting out of trouble is calmly deemed to be the priority, then another couple of nickels is not going to be important. What’s more important is not panicking and knowing what you are trying to do is based on a good decision.
    It really is difficult for some traders to accept the fact that the loss has already occurred and that the best course of action is to own a better position for the future. They would rather take the risk of market direction and hope to eliminate the loss.
    I have a lot of trading experience, but there are always experts who know more than I do and who have an edge by using sophisticated tools.

  15. alfiesaden 01/04/2012 at 4:49 AM #

    hi – is it just me !! can any one explain why when i type in the firefox browser “” i get a different site yet whe i type it in google its ok? could this be a bug in my system or is any one else having same probs ?
    alf saden

    • Mark D Wolfinger 01/05/2012 at 8:37 AM #

      I don’t see the same problem.