In a speech delivered to the American Enterprise Institute in late 1996—in the middle of the formation of the dotcom bubble of the 1990s—then Federal Reserve Board Chairman Alan Greenspan coined the term “irrational exuberance” to describe an illogical optimism about the economy that was pumping up stock prices well beyond any reasonable level. History shows that he was correct, as the bubble ultimately burst at the beginning of last decade.

I always warn my options mentoring students against two psychological traps into which most income options traders fall at one time or the other—irrational exuberance and irrational pessimism. Both are obstacles to success, but irrational exuberance can be fatal. I’ll give you an example from my personal experience.

Income options strategies are normally played monthly and are generally profitable when the market trades in any kind of a reasonable range over the course of a trade. However, I’m not aware of a single monthly-income options strategy that can be relied upon to make a profit every single month in any year. You will always have a losing month over the course of a year with any strategy, and in fact some of the highest return strategies may have three or four losing months in any given year.

Please do yourself a big favor and write this one down on your mirror and read it every morning before you turn your computer on: JUST BECAUSE I HAVE MADE MONEY ON AN OPTIONS INCOME STRATEGY FOUR MONTHS IN A ROW DOES NOT MEAN THAT I WILL MAKE MONEY ON THAT SAME STRATEGY IN MONTH FIVE. I really wish someone would have told me that when I first got started trading options.

I made this exact mistake trading high probability condors at the beginning of my trading career. During my first year, I made money four months in a row using the same simple high probability condor strategy in the same index at the same level of capital.

In fact, I was so ecstatic over my new found get-rich-quick scheme, that I then uttered to my trading partner, Tony,  the single most foolish statement that I have ever made as an options trader. I walked into Tony’s office after closing my fourth profitable monthly trade in a row and said, “This is like stealing candy from a baby”.

Please, never say something that dumb to anyone. In fact, please don’t even think it.

The next month of course I lost money on that same strategy. And even that should not have been a problem for my annual P&L except for one small additional misstep that I made. I tripled my capital level in month five. After all, why not steal three times the amount of candy from the baby, if it’s that easy?

As you would expect, I gave back everything that I made in the first four months on that one loss.

Ironically, this condor approach was a perfectly good strategy—one that would have produced a fine return over a twelve-month period using the same capital level throughout the year. But I got greedy, did not respect the market, and squandered my initial gains in one month by overlooking the obvious.

In my next blog post, I’ll share with you the advice that I give to my mentoring students so that  they can avoid this potentially fatal mistake. It’s really pretty simple.