While there are common themes to every kind of trading discipline, there are of courses differences as well. Options spread trading, for example is a very different world in many respects from day trading. At SMB, our intraday equity traders tend to focus on the opening hour and the closing hour of trading, with sometimes very high speed activity and decision-making occurring during those peak trading hours. It takes a great deal of purposeful practice and ex-perience to be able to make such fast decisions and execute those decisions rapidly, during, for instance, the opening drive of a stock in play.
Options spread trading actually revolves around the basic principal that short options benefit from time decay, which translated into English means that, slowly over the course of an options trade, formerly mediocre trades “bloom” and become very profitable. And in turn, just like a flower that you pull out of the ground before it has had a chance to bloom, if, in an attempt to cut risk too frequently, options traders keep fooling around with their positions–taking multiple realized losses to control risk, each time covering the very short options that constitute the core of the profit potential of the trade–traders inadvertently “butcher” the trade to the point where there is almost no profit potential left.
This tendency to “overadjust” an options trade, is one of the many early pitfalls into which developing options traders can fall. It usually happens because an options trainee is watching every tick of the market during the trading day, and as a result, micromanages his options trades to deal with intraday moves that are so often reversed during the trading day and were ultimately irrelevant to the original position.
Here are my two favorite solutions to the tendency to chop up your trades with emotional adjustments that you almost always regret later: take a full time job, or just move to Australia and sleep while the market is open in the U.S.
You probably think I’m kidding……..
Some of my best options mentoring students over the years have been people with demanding full-time jobs, who simply can’t watch every tick of the market due to the demands of their jobs. Rather, they put contingent orders in at the adjustment points of all of their trades (a skill pretty easily learned, but a skill nonetheless) so that if the market makes a big move, the necessary adjusting trades will be fired off automatically by their online broker.
In fact one of my finest students was a guy from Australia, who was literally asleep during almost the entire options market trading day in the U.S! Stuart was bright and diligent and had thought through the various market scenarios likely to occur on any trading day. He’d put his contingent orders in, reflective of the needs of his trades in those various market scenarios and then shut his computer off and went to sleep.
Whether you are holding down a demanding full time job, or have to sleep during options market hours, you have one big advantage over the traders watching every tick of every trading day–you won’t make emotional decisions based on short term moves that ultimately get erased by the ebbs and flows of the trading day. As a result your options trades have a chance to bloom. So learn a lesson from those who do not have the opportunity to watch the market every second–don’t micromanage your options income trades and you’ll be more successful.
Director, SMB Options Training Program
The SMB Options Training Program is a twelve-month program designed for novice and intermediate level options traders who are seeking an intensive training process to learn how to trade options spreads for monthly income. For more information on this program contact Seth Freudberg: [email protected].
8 Comments on “Can I Trade Options While Holding Down a Busy Full-Time Job? How About While I’m Asleep?”
It’s like you’ve reached into my office and spoke directly to me. I’ve paid the price of micromanaging and my PnL reflects it. I’ve since turned that PnL hit into “tuition.” I’ve still got work to do, but hearing you say this rings true for me. Sometimes, I’m my own worse enemy while letting time decay fully develop.
great post seth, so so true
When I’ve gone back and analyzed my trades, I’ve found that many times when I’ve made adjustments to cut risk I just decreased the profitability of the trade as you stated Seth. Had I not been so trigger happy and stuck with my plan, most of the time I would have had a much more profitable trade. This is exactly where I’ve had to learn to adjust my trading style to fit the risk tolerance that I’m comfortable with … if I am not willing to take as much risk and consequently adjust earlier, I must realize that, on average, I will have smaller profits. If this is my approach, I must also adjust my max losses accordingly.
When I’ve gone back and analyzed my trades, I’ve found that many times when I’ve made adjustments to cut risk I just decreased the profitability of the trade as you stated Seth. Had I not been so trigger happy and stuck with my plan, most of the time I would have had a much more profitable trade. This is exactly where I’ve had to learn to adjust my trading style to fit the risk tolerance that I’m comfortable with … if I am not willing to take as much risk and consequently adjust earlier, I must realize that, on average, I will have smaller profits. If this is my approach, I must also adjust my max losses accordingly.
Tom, I think you’ve thought this through perfectly. Every trader must honestly be able to accept that in any month, their max loss may be triggered. If that dollar loss, when it really starts to look possible, is too big of a number for the trader to truly accept, then he/she is trading too large, at least for the time being. As you have now experienced, very often victory can be snatched from the jaws of deteat in options income trading. But if you pull the plug on a trade before you hit max loss, very often you’ll look back and realize you would have had an excellent month had you been willing to allow the trade to approach, but not ultimately hit, the max loss.
I’ve been there Matrix. It takes tons of discipline to let these position “bloom”.
Tough part to learn, for me, is deciphering a trade that needs to bloom versus, it’s dead and to cut the trade loose. This seems like more of art than science.
Matrix, with options spreads it’s almost always more important where the market is trading in connection with your risk graph then exactly where your P and L is on the trade in the middle of the game. This is particularly true early in the trade, when theta decay hasn’t really kicked in too strongly. If you are down money, but have plenty of theta, your deltas are under control and you are sitting near the middle of your risk graph, chances are cutting the trade loose would be a mistake, all other things being equal. If you ever have a position where you would like a second opinion as to whether it’s time to call it quits or not, so I can givey you a feel for the decision making process, just send me an email and I’ll see if I can be of help–[email protected]