Continuing our Huge Options Trading Blunders Series, in this video we drill down into the reason why hopping from one options strategy to another, is a losing practice which will result in sub-par results for the serious options trader. We explore in this video exactly why that is the case with a vivid example of exactly how this counter-productive process plays out.
View Video Transcriptokay so today’s video is the sixth in
our series that we’ve entitled huge
options trading blunders we’ve decided
to produce this series for traders who
are really serious about trading options
for a living and badly want to succeed
but they keep getting sidetracked by
chasing trades and ideas with huge flaws
in them instead of taking the proper
steps to excel as an options trader
I’m the head trader of SMB capitals
OPS’s trading desk and I can tell you
for many years of experience that I’ve
seen every one of the mistakes that were
going to be describing in these videos
in fact I made some of these very
mistakes when I first got started
trading they’re real and if you’re
serious about trading for living you
really need to pay close attention to
these videos so that you can avoid
serious problems and unnecessary detours
in your trading journey so if you’re
committed to trading full-time as an
options trader then I urge you to watch
this video and the rest of the videos in
this series so that you don’t fall by
the wayside like so many aspiring
traders who don’t want to spend the time
to learn the actual truth about the
rewards and challenges of options
trading and the skills you’ll need to
truly succeed we want you to take a
realistic path to your trading goals
which are attainable if you’re serious
and willing to put in the work to
succeed
[Music]
hi I’m Seth Freuburg and I’m the head
trader of SMB capitals options trading
desk SMB capital is a proprietary
trading firm located in midtown
Manhattan and we provide capital for
options and equity traders from all over
the world trading both remotely and in
our offices here in New York City now
I’d like to suggest that you click on
our subscribe button right now so that
you don’t miss any of our free trading
videos that we produce for traders and
investors all over the world they’re
really very valuable ok so today we’re
gonna be looking at options trading
blunder number 6 in our series on
options misconceptions and huge mistakes
that you can make in your journey
towards becoming a full time options
trader so blunder number 6 like many of
the other blunders we’ve explained in
this series arises out of the very
common human tendency to compare your
recent performance to other traders and
become envious if they’ve had recent
success while you’ve had recent failure
does this sound familiar it happens to
just about everybody in thinking that
way can lead to some very foolish
decisions so most of you probably don’t
realize this but for many years I was
the CEO of a property and casualty
insurance company that had over 200
employees and when you run a company of
that size one skill you definitely need
is to have an ability to identify talent
you end up reading a lot of resumes tons
of them and in order to stay sane
through that process you need to have
some way to eliminate candidates from
the competition for top job just to
narrow your choices down to a reasonable
number of people to interview so one
rule that I had and I know this sounds
tough but the rule was that anyone who
had more than three jobs in the last ten
years was eliminated from the running so
what was my purpose behind this
guideline well it’s simple logic really
you see most people will have success in
their careers tend to establish strong
relationships with peers and managers
they’re valued employees and their
managers see their value and so they do
a lot to retain them as employees such
as promoting them giving them nice
salary bumps giving them specialized
kinds of training and anything else they
can think of to keep the employee happy
as
so the employees tend to stay at the
same company for a lengthy period of
time well that’s the kind of person
you’d want working for you right whereas
on the other hand job hoppers were
people who tended to be incapable of
stablishing strong ties with others and
they were always disgruntled typically I
found that they were not particularly
good or reliable performers their
managers didn’t particularly value them
nor did they do anything special to
retain them consequently they began to
look for other jobs before they got
fired because they sensed their managers
didn’t value them or preemptively quit
because they were pretty sure they were
about to be fired
and this pattern would continue from job
to job they performed poorly they’d
complain and were disgruntled because
they didn’t get the respect that they
thought they deserved even though in
most cases they didn’t really
particularly deserve it and they would
end up quitting on the brink of being
fired or they would quit out of a sense
that the grass would always be greener
on the other side which it never was of
course but most importantly earlier in
my career before I put this rule into
place I noticed that anytime that I
hired a job hopper type that they would
inevitably quit working for us in
predictably
about two or three years until I caught
on to this pattern why did I think that
we were such a great company that a
person with this pattern was magically
gonna snap out of his pattern and
suddenly change and become a valued
contributor the team when that was not
his or her history at all and the truth
is that there is no logical reason to
believe that and inevitably the job
hopper would hop on to another job and
as far as I could tell the pattern would
never change as I followed their careers
from a distance as they continued to hop
from job to job so you’re probably
wondering what all this has to do with
trading and the answer is that over my
options trading career I found that
there are certain traders that I would
call strategy hoppers the pattern with
these kinds of traders is that they
establish a bread-and-butter strategy
for themselves that they trade on a
continuous basis for some time and
experience success with it and then they
run into a rough patch where the
strategy loses two or three months in a
row so what they start doing is
listening to other traders
were chattering about the newest
shiniest strategy what I call the
strategic flavor of the month and
believe me there’s always a new flavor
of the month strategy I’ve watched this
develop my entire trading career and so
what happens is that some new strategy
that has experienced recent success is
catching on and a lot of people doing
that exact same strategy are naturally
all having success and therefore are all
bragging in unison about how great this
strategy is and so the guys trading the
strategy which happened to perform
poorly are watching these guys brag and
instead of viewing the situation
maturely they get envious and then they
fall into options blunder number six
which states I’m switching to the option
strategy that is crushing it for
everyone else because mine lost money
for two months in a row and so they
dropped their current option strategy
like a hot potato and rush to start
trading the one that’s making everyone
else rich now before we explain in vivid
detail why option strategy hoppers
always fail I wanted to let you know
that there really are sound viable
long-term techniques for trading options
for income and in fact we’re currently
running a two our free intensive
workshop at the moment where we’ll be
teaching you three of those strategies
that real professional options traders
use including a really simple but
incredibly effective technique that some
of the greatest investors in the world
like Warren Buffett use all the time
plus an options trading strategy that
has a statistical 80 percent probability
of profit month in and month out plus an
option strategy that you can employ with
the stock that you like where you’ll
make your target profit whether the
stock goes up goes nowhere or even goes
down a small percentage so if those
strategies would be of interest to you
then you should check out the free
options class that we’re currently
running just go ahead and click the link
that should be appearing now at the top
right corner of your screen that will
open the free registration page in a new
window so don’t worry you won’t lose
this video or you can just head on over
to options class com to register for
this free intensive workshop it’s a rare
opportunity for retail traders and
investors to
directly from Wall Street traders but
that’s exactly what you’ll be getting
through this free online workshop so
click the link to sign up now and don’t
miss it ok so what is the fallacy of
strategy hopping that traps so many
traders that fall into this options
trading blunder well let’s think about
it you see anyone who’s serious about
options income trading will rigorously
backtest any strategy that they’re
considering trading whether they’ve
designed it themselves where they’ve
learned it from someone else and they
will invariably find that there are
periods when that particular trading
style is hitting the ball out of the
park and other periods where it loses
money and incidentally it is often the
worst periods of time for a strategy
that are followed by its best periods
but that’s a discussion for another day
in any event there’s no way around the
cyclical nature of options income
strategies no strategy works in every
market environment I don’t care how well
designed it is every strategy has market
situations which will cause it to lose
money it’s as simple as that
and if you’re not prepared to believe
that you will go through periods where
you’re otherwise totally sound strategy
doesn’t make money then do yourself a
favor and quit trading right now because
you’re never going to find a strategy
that won’t have such periods and the
irony is that your back tests will
undoubtedly reveal those weak periods
and you will in a simulated way anyway
experience those down periods but
because it’s not real money and it’s
just the simulation you’ll take those
losing periods and stride if at the end
of the backtest you realized that the
strategy in fact yielded a solid return
over a sustained period of time if you
find an approach like that any logical
trader will start incorporating that
strategy into his trading practice going
in with his eyes wide open recognizing
that the strategy will go through its
ups and downs just as it did in back
tests but after all said and done at the
end of the day the strategy provides a
solid outcome ok so here’s a real-world
example of exactly what I’m talking
about and this comes from a strict back
test of two of the strategies that we
track and for which we’ve actually
produced video courses so the first one
on the left
that’s known as the bearish butterfly
and in 2013 the strategy did very poorly
it basically just broke even at less
than a 1% return during that year
another option strategy known as the
bull knocked it out of the park and
actually made over 60% that year and
incredibly successful years so the
inexperienced bearish butterfly traders
probably thinking to himself hey look at
those guys over there trading the ball
they made 61.6% I’m over here trading
the bearish butterfly and I barely broke
even
so my momma didn’t raise no fool I’m
switching to the ball and so the next
year in 2014 as and as he probably could
have predicted if you were thinking this
through
sure enough the bearish butterfly has an
insanely good year as it often does with
the return of one hundred forty six
percent while the bull has a nice year
we’re twenty returning twenty six point
eight percent but nothing like the grand
slam home run of the bearish butterfly
that year and almost as though the
market was trying to rub it in your face
the next year the bearish butterfly
again went into triple digits at 107
point 6 while the bull ran down to
single digits at eight point six percent
and finally to make matters worse and
mind you this was totally predictable
had you simply stuck to either one over
the three-year period you would have
fared much better
and while the bearish butterfly strategy
that you dropped early on performed much
better than the bull as you can see
either of the two strategies performed
way better than the trade hopper
successful traders ride out those
difficult periods like the bearish
butterfly trader experienced in 2013
because they’re secure in the knowledge
that these difficult times are
inevitable but they don’t last and
instead the strategy should return back
to its historical return rates whereas
strategy hoppers defeat themselves by
abandoning the knowledge that they
picked up through their back tests and
bail out on the strategies just as soon
as they’ve had a short unsuccessful
period of time they back tested it yet
they completely forget that a period of
losses is just as predictable as a
string of wins but because they’re not
mature traders they
basically can’t handle that they
actually lost real money trading the
strategy even though intellectually that
was a fully expected chain of events and
they’re back test in fact had such
periods yet they still decided to trade
the strategy with live capital because
it was so compelling instead they got
the spawn dn’t about the strategy
prematurely and instead they go and fall
in love with a shiny new strategy that
everyone’s bragging about because it
happened to go through one of its strong
periods while yours was going through
one of his completely predictable weak
periods if you talk to anyone who has
strategy hopped before there’s a very
good chance that they will tell you that
the minute they switched over to the new
strategy that very same shiny new
strategy started to lose money and lo
and behold the strategy they abandoned
suddenly starts working again the truth
is that the strategy never stopped
working in the first place it just went
into a predictable down period followed
by a predictable up period and the new
strategy that the trader hopto had gone
into an equally predictable down period
now this is not to say that if other
traders over a long period of time are
experiencing sustained success I’m not
saying it’s a bad idea to take notes and
to strive to understand why they’re so
successful over a long period of time
and possibly incorporate some of their
ideas into your trading I’m not saying
that at all in fact that’s a very
positive practice but what I’m saying is
that if an options trader has
experienced a few recent successes while
you’ve experienced a few recent failures
that’s simply not enough data to reach
any conclusions at all let alone a
drastic decision to completely switch
your bread-and-butter strategy to some
other strategy because some guys are
over there high-fiving each other about
some recent wins using that strategy
rather so long as the market has not
owned undergone some fundamental change
that may have actually rendered your
strategy ineffective and that does
occasionally happen as long as that is
not the case then trade hopping simply
doesn’t work I would say that most of
the time when you trade hop the strategy
that you
the way from starts performing better
than the one you hopped to it’s just the
way it is it’s the way it seems to work
out
ask any experienced trader you don’t
have to take my word for it
so don’t fall into options trading
blunder number six
instead behave like a mature experienced
trader and abide by the backtest that
led you to incorporate this strategy
into your trading practice in the first
place that’s the way professional
traders think and conduct themselves now
just to remind you as I said earlier if
you enjoyed this video and learned
something valuable from it we’d like to
learn the details of three real-world
option strategies that professional
options traders use all the time then
you should check out the free options
class that we’re currently running just
go ahead and click the link that should
be appearing now at the top right corner
of your screen that will open the free
registration page in a new window so you
won’t lose this video don’t worry
or you can just head on over to options
class comm to register for this free
intensive workshop it really is a rare
opportunity for retail traders and
investors to learn directly from Wall
Street traders but that’s exactly what
you’ll be getting through this free
online workshop so click the link to
sign up now and don’t miss it and please
don’t forget to click on the subscribe
button right now so you won’t miss the
next episode of huge options trading
blunders and all the other free trading
videos that were posting constantly on
our channel to help you to improve your
game as an options trader
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