What’s so Wonderful About Trading with No Market Bias?

Most traders have a directional bias.  Some have a volatility bias.  Getting either of those right can result in significant profits. And that's especially true when the market undergoes a strong move in either direction or when volatility makes a big move higher or lower.

Regardless, I learned to trade from a market neutral standpoint and have been proud of myself for sticking with that neutral outlook.  However, a question from a reader made me exit my stupor and consider the question:  What's so wonderful about trading without a market bias?

Well – I told myself – I don't care which way the market moves.  I'm in good shape either way (depending on my position and the size of the move).  Who could argue that this isn't the best place to be?  The answer to that question is every trader who makes money by leaning long or short.

But, I'm reconsidering, and looking at different aspects of my neutral bias.  Why is it better?  Why is it safer?  Why is 'neutral' any less of a market bias than long or short?  The sad truth – or at least I'm wavering about it being the truth – is that it isn't any better.  I've been brainwashed my entire career.  Is that possible?

Traders with a market bias hold positions that suit that bias.  I like to
describe my bias as non-existent, but the truth is, adopting an iron
condor strategy is best for traders who believe that the market is not
about to make a big move.  Having no bias, I'm 'hoping' for a
range-bound market, rather than predicting one. That forces me to consider the questions:  Believing that
hope is not a
, how can I trade iron condors?  How can I choose a strategy that depends on having a range-bound market?  If I am not confident that the market will be trendless, aren't I adopting a strategy of hope?

That is one scary thought.

I must rely on skillful risk management to survive.  Without the possible big win that those with a market bias can score, I trade strategies with limited profit potential.  That's fine because they come with limited loss.  But I am very much dependent on holding losses to modest amounts and managing my positions well.


As a market maker (1977 through 2000), it paid to remain neutral.  That allowed me to participate in all order flow (buy bids and sell offers) without being afraid.  When I was caught short and stubbornly refused to buy stock, I was in trouble when more call buyers entered the pit. [This was a problem because every market maker who sold those calls was going to bid for stock, pushing the price higher.  Thus, not being caught long or short had a monetary advantage.  Obviously I had the right direction part of the time, but being neutral left the market maker ready to take advantage of any order that enters (what was then called) the trading pit.]

When I worked for a trading firm, they insisted on traders being as neutral as possible at all times.  Not just delta, but all the other Greeks as well.  That made sense because our goal was to trade for an edge.  Using proprietary models, the idea was to buy Greek neutral spreads with a theoretical edge.

I'm trained to be neutral.  It was drummed into my head since 1977.  But now, 10 years after leaving the trading floor, I'm wondering if there's any advantage to being neutral.  Why can't I choose an iron condor with a bias?  Or adopt a bullish strategy in the first place?  Why should I allow a slow, steady unidirectional bull market be so difficult to trade?  Why don't I open my iron condor by selling extra put spreads or farther OTM calls or do something with a bullish bias (add some call kite spreads)?  I don't have a good answer to any of those questions.

I always believed neutral was the least risky choice.  And it is when you believe the market has an equal chance to move higher or lower on any given day, or over any given short period of time.  But why should I, or anyone else, believe that?

The news is horrible, and the future looks bleak to me – with high unemployment and all signs pointing to a commercial real estate bubble.  Businesses are not growing, real crises loom large (Greece) – but who cares?  Not 'the market,'  It just marches ever onward.

This is a bull market (which may end before this is published) and why shouldn't I trade just a little long?  What's wrong with that idea?  I don't know, but I am unable to do it.

Can anybody answer?  I've traded with no bias for so long, that it just feels right.  As indicated above, If asked, I'd claim to be a bear.  But  I cannot afford to wager on that bias, especially when being long has been the winning move for a year.  Why is it so difficult for me to trade long?  I have no answer.  For now, I rely on the (flawed?) safety of market neutral.


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32 Responses to What’s so Wonderful About Trading with No Market Bias?

  1. David 03/23/2010 at 5:52 AM #

    Awesome post. I have been wondering exactly this myself recently. Especially with IV so low that I don’t get a ‘good enough’ price when opening an IC.

  2. I think I have an answer for you, Mark.
    One of your biggest themes is how personal trading is. Just yesterday (or was it Friday?) you tried to help a person with a position by pointing out that he could buy insurance or maximize his profit. Realizing that he might not know which would be best for him, you gave two examples of less-than-optimal outcomes, and asked him (and us) to visualize those outcomes and make choices that leaned toward the less unpleasant one. You were careful to point out that every trader is different, and that psychology is a huge part of trading and risk management.
    And therein lies the answer. Your whole trading career you associated market/Greek neutrality with goodness. The concept of “taking a flier” hoping to make big gains at low cost but low probability sounds like gambling to you. Your market neutrality was reinforced early in your career by management when they had talks with your position when it veered too far away from the ideal. Your market neutrality was reinforced by the market itself during your market-making days (arguably one of the most heavily sideways-biased trade businesses out there). And now being market-neutral is your comfort zone, and leaving your comfort zone causes cognitive dissonance: first, if you profit outside your zone, you feel lucky; second, if you lose outside your zone, you feel like your comfort zone has been reaffirmed and you subconsciously vow not to cause yourself that pain again.
    So to answer the question, “what’s so wonderful about trading with no market bias?”: What’s so wonderful is that you’re good at it, and you enjoy it. What could be more wonderful?
    Maybe you should go read over your post archives… there’s a lot of good advice for you in there. 😉

  3. Mark Wolfinger 03/23/2010 at 7:45 AM #

    Mr. facebook:
    Thank you.
    A great comment to start my day.

  4. rick f 03/23/2010 at 7:50 AM #

    If I may invoke some verbal ju-jitsu and use some of your own advice against you: trading is a personal thing and if you have found something that works for you and your personality, stick with it. Or, put another way, “advisor, advise thyself.” 🙂
    FWIW saying, I take what the market gives me and trade according to my own style/system. If the market says be neutral, I will be neutral (or more likely flat) — if it says be long, I’m long. If it says be short, I’m short.
    I generally prefer selling options to buying them. However, at the moment I’ve taken a few long option positions (spreads) in directional plays for well into the future, because I’m not feeling comfortable doing any range-bound trades. Why do I say that?
    The markets may be heading up, but it’s on decreasing volume, and is continuing into stratosphericly-overbought territory where I find it very hard to put on a range-bound or neutral trade, because in my view either a) we continue to melt up, or b) we snap back, HARD. I don’t want to make zillions of risk adjustments on my trade in such case, so for me, the prudent course of action is to either sit aside or look for promising directional bets.
    That’s my view, anyway.

  5. rick f 03/23/2010 at 7:55 AM #

    I should add that I am *never* opposed to self-analysis and trying new ideas or trading styles … that’s how we learn, grow, and evolve as traders.

  6. Mark Wolfinger 03/23/2010 at 7:57 AM #

    That makes good sense.
    Yet, there must be a limit on what one tries. Being a bit long or short is within that limit. Buying 500-lots of cheap calls in hope of a miracle is not.

  7. Mark Wolfinger 03/23/2010 at 8:01 AM #

    It’s a good view.
    It doesn’t work for me simply because I never have a strong feel for market direction. I do zero technical analysis, and although ignorance is a poor excuse and suggests laziness, I know nothing of TA and don’t want to begin learning at this stage of the game.
    I have many other time-consuming responsibilities.
    I do like your sane approach. I’m glad it works for you. And I suspect many trade this way.

  8. rick f 03/23/2010 at 8:33 AM #

    Oh I never meant to imply taking idiotic chances like that, Mark – there’s still such a thing as common sense and risk management. That’s akin to rolling the dice and/or placing all your money on red.
    I would never discourage anyone from researching and exploring other trading styles or techniques to “broaden your horizons” within their comfort-zone of risk/reward and framework for risk management. It’s the only way we ever learn as people and traders.
    Obviously, if you find you aren’t comfortable doing so, then by all means stick with what works best for you and lets you sleep well at night.

  9. Mark Wolfinger 03/23/2010 at 8:46 AM #

    It doesn’t have to be 500. It can be a 10-lot.
    Yes, common sense and comfort zones.
    Sleeping at night. Ah yes. Years ago I had many sleepless nights but I never knew enough (in those days) to fix the problem.
    thanks Rick

  10. Burt 03/23/2010 at 10:46 AM #

    Mark, There may be nothing wrong with a market neutral strategy. But there are other elements to the question that might be useful to consider:
    1. What’s wrong with only trading RUT market neutral? Separating the strategy from the asset class may be only a partial analysis.
    2. Is market neutral really neutral? The strategy suggests one is not forecasting the market. But isn’t it really betting on mean reversion, since prices never stay in one place?

  11. Mark Wolfinger 03/23/2010 at 10:55 AM #

    Hi Burt,
    It’s a combination of mean reversion and a bet on low volatility. It’s ‘neutral’ in that delta is near zero – and that’s the classic definition of neutrality that I am now having so much difficulty in accepting.
    It is easier to trade negative gamma positions with a neutral (or mean reverting) bias. But is that the best choice? As has been pointed out by Mr. Facebook (don’t know his name) it works and I’ve lots of experience with it.
    In recent times, the markets have been anything but volatile. Yet the walks have not been random. They have been to the upside. I’ve never been a trend follower, but maybe I should follow the trend with an extra 200 to 500 delta or just some modification of my neutral stance. Just a tweak, nothing drastic.
    Not so easy for me to pull the trigger, so I guess comfort zone is not there.

  12. RS 03/23/2010 at 12:49 PM #

    I too trade Iron Condors (IC), and I have changed (and continue to change) the way I trade it. I started out being neutral with high probability IC, which was good at first, but then I got tired of bull runs. Not only was I struggling, but psychologically it was worse because other people were enjoying the bull market. This probably shouldn’t affect me, but it did.
    What I ended up doing was concentrating on the put credit spread, bringing the short strike closer, but buying put options even closer to the money. As for the call side, I pushed it out further OTM and slightly reduced the quantity. While I didn’t want to worry about the call side, I still wanted some of the extra premium. My main focus is on the put credit spread, and being prepared to adjust aggressively (early) if the market turned. Basically I now have an uneven IC with closer puts than calls. Actually – that’s only by looking at the deltas of the short strikes, the absolute distance is about even because of the skew. The total delta was still quite negative, because I have insurance on the put side.
    Even with the change and early hedging, I’m still so far losing money on paper from this bull run but not so much, and I’m doing much better than I would have with my old IC method. I have a full plan of when and how to adjust on the downside, but the upside plan wasn’t exactly formalized as I didn’t expect to be in danger so much. I now have a better idea and a better plan to deal with bull runs, and again it’s easier because I’m further out and with smaller quantity than the put side.
    So far I still feel comfortable with this method of trading the IC. Anyway, I just wanted to share it.

  13. Mark Wolfinger 03/23/2010 at 2:57 PM #

    Your idea is a bit of what I suggested. Fewer calls and/or farther OTM. Even that’s not enough.
    I think your portfolio needs a small number of naked long calls. I don’t ever suggest buying OTM calls as an adjustment, but if it’s not really an adjustment and only ultimate protection, OTM may be good enough to prevent getting hurt. IV is not an obstacle to buying them.
    But it just ‘feels’ wrong, doesn’t it?
    One idea is to sit on the sidelines until times are better for IC traders, but I don’t like that idea, and assume you don’t either.
    Another is to just begin adjusting earlier – even if it’s just a one lot here and there.
    Thanks for sharing.

  14. RS 03/23/2010 at 3:41 PM #

    I don’t like buying OTM options on the call side, although they are cheap. On the put side, I could see buying wing puts or a small amount of further OTM puts, although I still like closer to the money puts – sometimes I have both front and back hedges.
    With the unbalanced IC I’m trading, the market has attacked me on the call side twice already, moving close to 5% within less than a week of initiating the trade. But still, I was around breakeven marked to market and had plenty of time to start hedging my position. Maybe adding a little insurance might be good, but right now I feel comfortable without one. I do adjust early.
    I use rudimentary TA, and sparingly. When initiating the IC, I want the market to be at or close enough to the MA. If the market is so high above the MA and it’s around the time I normally put on an IC, I still do so, but only a fraction of the position, and I will scale in the rest if conditions improve.

  15. Mark Wolfinger 03/23/2010 at 4:10 PM #

    You have a good plan, and that’s important.
    If you comfortable and adjust when (or before) it’s necessary, you’ll be fine over the longer term.

  16. TR 03/23/2010 at 6:09 PM #

    My thought process on why I like market neutrality is that I don’t believe I can predict which way the market will go, and the current market price at any point in time is the price that thousands of traders – most much smarter than me – have “agreed” is the right price. I guess this is related to the efficient market hypothesis (EMH), but even if the EMH is false, I still don’t believe I am any smarter than the collective wisdom (inefficient as it may be) of all the other traders out there. My best guess as to the “right” market price is the exact same price that all the other traders have set it at.

  17. Mark Wolfinger 03/23/2010 at 7:53 PM #

    Hi TR,
    Sure. That’s the argument. But if I don’t know which way it’s going, why is zero delta best? Just because the current price is the ‘right’ price, why isn’t + 500 or perhaps -300 best, or any delta number best? That would be a wager on what the ‘best’ price will be later. It’s not a bet on what the best number is now.
    The fact that I don’t know has no effect on what the results will be.
    I do not accept the hypothesis that the market has an equal chance to move one way or the other on any given day. Trends do exist. The reason we don’t play them is that we never know if it will continue or reverse.
    I truly do not know the right answer (for me), so neutral it is, but I don’t like it. And maybe that’s the only clue that counts: I don’t like it.

  18. Brendan 03/23/2010 at 9:50 PM #

    Mr. Wolfinger,
    I’m new to your blog (I love it thus far, by the way) and couldn’t resist commenting on today’s post. Don’t we all deep down either believe in the fundamental resiliency of the markets and more notably, humanity, or believe otherwise? I tend toward the former but see no harm in admitting confusion, concern, etc. in adhering to a neutral stance over time.
    Can we connect sometime to think critically together re. my idea for a poor man’s collar by hedging PBP with a put? Thanks for your consideration.

  19. Mark Wolfinger 03/23/2010 at 10:27 PM #

    Welcome Brendan.
    You are a bit too respectful. Please call me Mark.
    It’s great to have a positive attitude. In the practical world, you get to retire only once and if you are broke because of bad market timing, that’s pretty sad.
    For shorter-term trading, most traders have a bias. I’ve believed that ‘neutral’ is the only logical choice for a long time, and am finally thinking about doing something different. A ‘lean’ – not a big risky trade.
    PBP must be the Power Shares buy-write index to create a collar with a put. Interesting concept. I’ve never thought about it. Sure, we can discuss it.
    But those options have almost zero open interest, and if the markets are wide, there is no chance to trade them with much success. You would be locked into the trade through expiration. That’s not a problem with most collars.

  20. Jason T 03/24/2010 at 7:11 AM #

    Hi Mark,
    If I recall correctly, there’s some empirical research out there suggesting that generally speaking short volatility on the index has an edge, I would think that staying (roughly) market neutral is the simplest way to express that edge without introducing too many variables. Trading long I think would mean abandoning that edge, maybe that’s what makes you uncomfortable?
    From a more personal experience, a couple of folks I know who trade with a directional bias very very well tell me that entry is a key determinant in making money. I’m absolutely terrible at timing these things, and every time I’ve tried I’ve lost money. I don’t seem to have any edge in that area, and no real reason to think I will develop a sustainable one anytime soon. I am confident that while having to constantly adjust/roll my positions is painful, I think I have an edge I that I can focus on.
    It may also be a time-frame thing, most directional trader I’ve seen seem to operate on shorter time frame (daily, hourly, sometimes even minutes) then I’m comfortable with outside of having a machine do it for me.
    Goodness knows that if I were smarter/more skilled I’d be swinging directionally, but as Clint Eastwood said, a man’s got to know his limitations.
    Eric Falkenstein (falkenblog.blogspot.com) has a theory that risk is actually relative, and the biggest risk is not that we underperform our markets, but we underperform relative to others (or even worse, people we think less of). Do most of the folks you talk to trade directionally or market netural? When markets are one way like this, I always think about going directional, and when markets are stuck, the trend traders all think about going market neutral.

  21. Mark Wolfinger 03/24/2010 at 9:08 AM #

    Good discussion. Reply as a post tomorrow.

  22. TR 03/24/2010 at 12:05 PM #

    I wanted to follow up to your response to my post – because I feel like I am missing something and I want to understand what I am missing. I realize that this may sound like I am debating you – please know that my only intent is to learn because you are causing me to think through what I believe and to challenge my own rational for how I am currently trading.
    My thought process that I posted is that I believe that my best guess for “right” current price is based on collective wisdom of the other traders out there and the price they have “agreed to” is. Could I not take then take this statement one step further and say that my best guess for tomorrows “right” price is based on collective wisdom of the other traders out there and the price that they have “agreed to” today adjusted for carrying costs? In other words if the collective wisdom of traders out there was that the market was going to go up tomorrow to a certain price X, would they not push the price up today to that same price X minus carrying costs?
    This would lead me to conclude that unless I believe I have a better guess on tomorrow’s price than the collective wisdom (inefficient as this may be) of all the other traders our there I should trade market neutral (adjusted for carrying costs). Please let me know if I am missing something.

  23. Mark Wolfinger 03/24/2010 at 1:27 PM #

    1) Agree. It is not a debate. I am also trying to figure out what to do.
    It’s not a question of missing anything. It’s trying to decide which approach is ‘better’ – or which yields more cash in your pocket.
    2) Suppose I take this argument (note the word suppose):
    a) The correct price is the right price, but that price is inching up every 10 minutes. The recent bias has been to agree that the correct price is slightly higher than the previous correct price of just a few minutes ago.
    b) What’s wrong with expecting that bias to continue? What’s wrong with leaning your deltas that way?
    c) Staying neutral is betting that the bias will end and that the current best price will remain the current best price. Why is betting that the bias will change any worse than betting that it won’t?
    2) I am raising the question. I am not supplying answers. I don’t know the answers.

  24. derek 03/24/2010 at 3:44 PM #

    I’ve read a number of your posts, Mark, and I think this is one of the best. I inherently carry that market neutral bias, but have spent a lot of energy devising ways to think beyond my bias. You are a very smart guy, so the answer will come even in the face of bias.
    My 2 cents…trend following offers relatively low probability of gain but tries to fully capitalize on that 1 in 10 that becomes a huge tail. Grabbing a slight bit of that positive skew with an extra call option here and there, even if only an 11:10 ratio, gives you psychological and financial cover against the one scenario to which you are exposed…runaway upside. Maybe you go the slightest bit delta short on the other than, and offset it with a higher long-short call ratio.
    But you know that already, I’m probably talking myself through this more than anything.

  25. Mark Wolfinger 03/24/2010 at 4:00 PM #

    Hey Derek,
    I do enough talking here, so you want to talk, I’ll listen.
    I appreciate the comments.
    And you make a very good point. The psychological edge that accompanies the feeling of less risk – and even a potential reward (on a giant move) – has real value.

  26. mrwoody 03/24/2010 at 5:23 PM #

    so why did you leave your previous job? too many sleepless nights?

  27. Mark Wolfinger 03/24/2010 at 6:03 PM #

    I retired from life as a market maker. 23 years was enough. I decided to turn to education.

  28. whitefish 03/24/2010 at 7:49 PM #

    If you’re trading an index short gamma centrally and long additional wingstrikes laterally, then I think you trade neutral delta because statistically the changes in underlying concentrate around the current price or they (infrequently, but potentially catastrophically) end up in a distant tail. Although I don’t have the data in front of me, the behavior of an index over a number of expiry cycles shows this to be true and is the traditional leptokurtosis you’ve known about for years. And your firm’s risk manager knew as well.

  29. Mark Wolfinger 03/24/2010 at 8:10 PM #

    Hi WF,
    My risk manager and I did not get along so well. I should have made him my best buddy and listened to everything he said. Alas, that was in the 1970s and 80s, a time when I was not going to listen to some guy who wasn’t a trader.
    BTW, I don’t buy extra wing options. I have a need for my extra longs to be CTM than the central strike.
    For interested readers, from wikipedia:
    “In terms of shape, a leptokurtic distribution has a higher probability of values near the mean and fatter tails” when compared with a normally distributed variable.

  30. whitefish 03/24/2010 at 9:15 PM #

    Well then, net long options but not net long enough to flip your gamma.

  31. Dave 03/29/2010 at 9:31 PM #

    Mark, that’s the best post I’ve read on this blog and I’ll bet I’ve read 95% of them at least.
    For several reasons including your exceptional teaching style I became fixated on market neutral– and with bad timing promptly missed most of this rally. Luckily I’ve shifted gears and joined the bull’s party, better late than never I guess…
    But what I learned on this blog has changed my (directional) trading dramatically (understatement). I trade OTM options long; reckless? Nope. Every mouse click is guided by an eye on risk.
    You’ve taught me well and you’ve taught me more than 20 or 30 years of my raw effort. Your “market neutral” blog is much more than just that.
    Thank You!

  32. Mark Wolfinger 03/30/2010 at 12:06 AM #

    Dave: Thanks.
    I also like this post.
    What I try to do here is open visitors eyes to the possibilities, allowing them to come to a good decision.
    Yes, I do give my opinion, but stress that it is an opinion and not gospel.
    Very happy to hear that I’ve made a contribution to your success.