Trading options is not easy. As is obvious, there is no one handing out prizes just for playing the game. You must work to make money.
Some traders are more successful than others. It's most likely that these winners put in their hours of study and preparation, but it's also possible that a few of them have been lucky. The bottom line is that if you are hoping to be one of the lucky ones, then you are a gambler, not a trader.
If you make an effort to truly understand what you are doing, if you devote time and energy to learning your craft, then that improves your chances of success.
The above is prelude to an email I received just two days ago. It upsets me on so many levels, but mostly because I feel sorry for this trader. He wants to be successful. He studies charts and thinks about his trades. But something is missing.
Here are a few excerpts from his message, along with my comments. I am not going to identify that reader.
I realize that I am your student. I'm inexperienced and foolish. I seek advice from the more experienced trader.
You are not foolish. You are only inexperienced. I'm trying to help you learn, but I would not go so far as to call you my student.
I opened an iron condor position when RUT was lower. This position has wiped out my profit from the previous three months.
Looking at my charts, I decided that 650 was the resistance point, so I chose to sell the 660/670 call spread. With RUT at 666 as I write on Sunday 3/6/10, resistance has been broken.
My reading of stochastics tells me the market is overbought and will soon trade lower.
If 650 was resistance, why are you holing the position now, with RUT above 666?
If you rely on support and resistance to help you make decisions, why did you ignore the breakout above resistance? If you don't rely on resistance, why did you bother to see where resistance lies?
You ignored resistance, but now you mention stochastics as an indicator that is telling you the market will decline. Do you have more confidence in this as an indicator than you have in your charts?
Why? Has this method of determining market direction served you well in the past? Do you have a proven track record of making money by using stochastics?
Or is this just another excuse to allow you to hold this position?
It appears to me that you are seeking any excuse to hold, rather than fold, and take the loss.
I always thought I could find the right place to roll the position to one that is safer, but I read that you believe 'rolling is not good.'
I never said that rolling is not good.
It's so disappointing to find that you not only ignored all the rules of managing risk, but you also claim to be my student, yet do not understand what I said.
Here's how I feel about rolling a position:
Roll only when both of these conditions are met:
i) You like the new position and want to own it
ii) You want to exit the current position
That's pretty simple, isn't it? Nowhere do I say it's 'not good.'
When you hate the new position and would rather not own it, it's beyond foolish to roll so that you now hold that hated position.
Here's what I see, and it truly makes me sad. The writer used technical analysis to choose his strike prices. When that analysis told him that his premise was wrong (650 is resistance), he ignored that fact. Note that he used TA to support his trade idea, but when TA sent a different message, he chose to ignore that message. Why? So he could maintain his trade.
He considered rolling the position, but chose not to do so because I told him that was 'not good.' Again, an excuse to hold the position.
The truth is that he owns this position, wants to own this position, and is afraid to act. He is unwilling to do what he knows is best and is now looking to stochastics to prove that the position is good and will become a winner, if given enough time.
He is hoping that the market will reverse. To tell the truth, so am I, However I am not ignoring risk and relying on that hope. As I have mentioned many times, hope is not a strategy.
To me there is a single word that describes my correspondent: Gambler. He has placed his wager and the race has begun. He looks at this as if it were a horse race. He bought his ticket and there are no refunds. Hedging his bet is apparently not allowed. He feels he must hold on to the trade and accept the results, whatever they are.
He had every opportunity to buy plenty of protection when RUT broke through 650. Now any protection is very expensive. A prudent investor or trader would do something to reduce risk. A gambler does nothing.
Dear correspondent: I know how bad you feel about this loss. You could have acted prudently. I know that you would hate to exit now and see the market reverse. But, if you had acted sooner, you would not be facing this dilemma.
I wish you the best of luck because it seems to me that you are depending on good luck rather than on learning how to develop good risk management skills.
If you prefer to be a gambler, then accept that is who you are. If you want to learn to be a trader, then there is much for you to learn. The first step is to reduce your position size and place much less money at risk.
New to Options? Interested in learning the basics concepts of how options work? The Short Book on Options, my 2002 eBook is far less comprehensive than The Rookies Guide to Options. Nevertheless it provides all you need to know to get started writing covered calls.