Nobody’s trading or investing journey is a straight road or easy path.  we never just magically trip into a perfect system or investing philosophy without a couple bumps along the way. Today’s podcast focuses heavily on overcoming the stigma attached to being “wrong” and having the humility and grace to learn from trading mistakes and transition into new habits.  In addition, I want to describe in more detail the two major mistakes that I’ve made over the last couple years with regard to trading that have changed the way I look at positions and my portfolio. Both of these have been discussed before in various formats but never in one place under this topic. I hope that by sharing my story, it helps give you the courage to make changes or alterations to your own options strategy for the better.

Key Points from Today’s Show:

  • How do you feel when you are told or find out that you are wrong?
  • Usually, people start to immediately break down inside and become subjective to themselves. 
  • The idea here is that since we don’t ever want to be wrong, we end up trying to become perfect A students.
  • Society, in general, teaches us not to make mistakes and shames them for being wrong.
  • There is no reward for trying something and failing and learning from that mistake.
  • Often times we blame others, in an effort to prove that you were right.
  • The reality is, we have to learn from our mistakes.
  • We have to recognize and embrace the fact that we are not perfect to get on the right path.

Stages of Assumptions:

1. Assume ignorance

  • When someone disagrees with us, we just assume that they don’t have access to the same information.

2. Assume idiocy

  • Think that those who disagree are too moronic to put the pieces of the puzzle together correctly.

3. Assume deliberate distortion of the truth

  • Believe that the other person knows the truth but that they are deliberately distorting it for their own purposes.
  • Although we all have the same set of information, everyone looks at it from a different perspective.
  • This is what leads to people making trading mistakes.
  • There are a lot of different paths to go down that can lead to the same destination.
  • The key is using the right trading framework to use.

Mistake 1: Trading only when IV is high

  • When I first started trading, I knew how important IV was.
  • Only traded during high IV situations, which was a big mistake. 
  • Took 3-5 months off of not trading when IV was low.
  • Then when IV was low, would trade all the trades I could find.
  • This created a feast and famine situation.
  • The key is, in fact, you should generally trade all the time even during low IV.
  • Scale down your position size, but still stay active. 

Mistake 2: Not holding trades long enough for profits

  • The profit matrix research shows a correlation between holding trades further than profit targets and the overall returns that you see on an account after 5 or 10 years. 
  • Holding a trade a little bit longer pays off big in the end. 
  • This will create the highest possible CAGR scenario. 

It is okay to recognize that you did something different before and that you need to change it and do it better next time.
You have to be willing to be wrong, in favor of potential strategic opportunities in the future.

Free Options Trading Courses:

  • Options Basics [20 Videos]: Whether you’re a completely new trader or an experienced trader, you’ll still need to master the basics. The goal of this section is to help lay the groundwork for your education with some simple, yet important lessons surrounding options.
  • Finding & Placing Trades [26 Videos]: Successful options trading is 100% dependent on your ability to find and enter trades that give you an “edge” in the market. This module helps teach you how to scan properly for and select the best strategies to execute smarter option trades each day.
  • Pricing & Volatility [12 Videos]: This module includes lessons on mastering implied volatility and premium pricing for specific strategies. We’ll also look at IV relativeness and percentiles which help you determine the best strategy to use for each and every possible market setup.
  • Neutral Options Strategies [7 Videos]: The beauty of options is that you can trade the market within a neutral range either up or down. You’ll learn to love sideways and range bound markets because of the opportunity to build non-directional strategies that profit if the stock goes up, down or nowhere at all.
  • Bullish Options Strategies [12 Videos]: Naturally everyone wants to make money when the market is heading higher. In this module, we’ll show you how to create specific strategies that profit from up trending markets including low IV strategies like calendars, diagonals, covered calls and direction debit spreads.
  • Options Expiration & Assignment [11 Videos]: Our goal is to make sure you understand the logistics of how each process works and the parties involved. If you don’t feel confident in the expiration processes or have questions that you just can’t seem to get answered, then this section will help you.
  • Portfolio Management [16 Videos]: When I say “portfolio management” some people automatically assume you need a Masters from MIT to understand the concept and strategies – that is NOT the case. And in this module, you’ll see why managing your risk trading options is actually quite simple.
  • Trade Adjustments/Hedges [15 Videos]: In this popular module, we’ll give you concrete examples of how you can hedge different options strategies to both reduce potential losses and give yourself an opportunity to profit if things turn around. Plus, we’ll help you create an alert system to save time and make it more automatic.
  • Professional Trading [14 Videos]: Honestly, this module isn’t just for professional traders; it’s for anyone who wants to have eventually options replace some (or all) of their monthly income. Because the reality is that mindset is everything if you truly want to earn a living trading options.

Option Trader Q&A w/ Jason

Trader Q&A is our favorite segment of the show because we get to hear from one of our community members and help answer their questions live on the air. Today’s question comes from Jason, who asks:

My question is around future options. I received the quarterly magazine published by Think or Swim, that shared an article on futures options and how they work. I was just curious to hear your take on it. I’ve heard that the commissions can be on the high-end, but it seems like something worth looking into, so any information you have to offer would be appreciated. Thanks!

Remember, if you’d like to get your question answered here on the podcast or LIVE on Facebook & Periscope, head over to OptionAlpha.com/ASK and click the big red record button in the middle of the screen and leave me a private voicemail. There’s no software to download or install and it’s incredibly easy.

PDF Guides & Checklists:

  • The Ultimate Options Strategy Guide [90 Pages]: Our most popular PDF workbook with detailed options strategy pages categorized by market direction. Read the whole guide in less than 15 mins and have it forever to reference.
  • Earnings Trading Guide [33 Pages]: The ultimate guide to earnings trades including the top things to look for when playing these one-day volatility events, expected move calculations, best strategies to use, adjustments, etc.
  • Implied Volatility (IV) Percentile Rank [3 Pages]: A cool, simple visual tool to help you understand how we should be trading based on the current IV rank of any particular stock and the best strategies for each blocked section of IV.
  • Guide to Trade Size & Allocation [8 Pages]: Helping you figure out exactly how to calculate new position size as well as how much you should be allocating to your each position based on your overall portfolio balance.
  • When to Exit/Manage Trades [7 Pages]: Broken down by option strategy we’ll give you concrete guidelines on the best exit points and prices for each trade type to maximize your win rate and profits long-term.
  • 7-Step Trade Entry Checklist [10 Pages]: Our top 7 things you should be double-checking before you enter your next trading. This quick checklist will help keep you out of harms way by making sure you make smarter entries.

Real-Money, LIVE Trading:

  • EWZ Iron Butterfly (Closing Trade): After nearly pinning the stock at our short strikes, and thanks to the volatility drop, we netted a $600 profit on this iron butterfly trade.
  • VXX Short Call (Closing Trade): One of the most consistent and profitable options trades we can make is shorting pure volatility with VXX and today we closed this naked short call in VXX after a couple days for a $420 profit.
  • DIA Iron Condor (Adjusting Trade): This neutral iron condor in DIA is need of a quick adjustment early this week as the market continues to rally. In this video, we’ll discuss why I’m adding an additional put credit spread while also choosing NOT to close out of our current put credit spread due to pricing reasons.
  • COP Short Put (Closing Trade): These single short puts in COP acted as a great hedge for our other bearish bets in oil this month and helped smooth out our returns after we closed them for a nice big profit.
  • TSLA Put Debit Spread (Closing Trade): Although many people thought we were crazy for getting bearish in TSLA this pre-earnings put debit spread trade made us $200 today. After the huge run up from $140 to $260 and getting some technical sell signals, we were pretty sure this stock would pull back.
  • MON Iron Condor (Closing Trade): Following a huge drop in implied volatility we worked hard to close this MON iron condor trade adjusting the order multiple times to fill before the end of the day.
  • IBB Call Debit Spread (Opening Trade): We’ll show you how I started searching for a new bullish trade and eventually found a low volatility trade in IBB looking for a move higher to hedge our portfolio.
  • TLT Iron Butterfly (Closing Trade): Following the Brexit vote TLT and bonds traded in a nearly $8 range really quickly – even still the drop in implied volatility helped generate a $330 profit for us.
  • XBI Call Debit Spread (Closing Trade): Got lucky picking the exact bottom for our entry in this call debit spread for the XBI biotech ETF which ultimately was closed for a profit of $165 today on the rally higher.
  • COH Iron Butterfly (Earnings Trade): Shortly after the market open we close out of our COH earnings trade for about a $160 profit, leaving just 1 leg on to expire worthless.
  • EWW Debit Spread (Closing Trade): Using some of the technical analysis signals we discovered in our backtesting research, we were able to make a quick $130 profit on this bearish EWW debit spread trade.
  • IBM Iron Condor (Earnings Trade): Shortly after the market opened you’ll follow along with me as we watch volatility drop and liquidity come into the market before closing out the position for $250 profit.
  • SLV Short Straddle (Opening Trade): Using our watch list software we decided to continue to add to our existing SLV short straddle position with a new set of strike prices reflective of the move lower in the ETF recently.

Thank You for Listening!

I’m humbled that you took the time out of your day to listen to our show, and I never take that for granted. If you have any tips, suggestions or comments about this episode or topics you’d like to hear me cover, just add your thoughts below in the comment section.

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