Jack “Treetop” Strauss was an accomplished poker pro back in the 1970s and ’80s. In 1982, he made it to the third “final table” of his career at the World Series of Poker. During the second day of the tournament, he was heads up (one to one) on a huge pot. After the last card was dealt, he pushed all of his chips into the pot on a bluff. His opponent called, and it appeared Strauss was finished. As he stood up, put on his coat, and got to ready to leave, he noticed a chip underneath a napkin. Since he did not declare “all in” on his last hand, officials allowed him to stay and play that ONE chip. Jack was back in the game!
He sat down, went all in and won the next hand and the next – about five in a row. Two days later, he had amassed a huge stack of chips, and he ended up beating Dewey Tomko in a heads up battle to win the title. His improbable victory gave rise to the phrase about a chip and a chair.
What poker has to do with risk management in options trading
I bring you this story to illustrate the importance of never putting yourself in a position to be out of the game. Now, clearly Strauss had luck on his side, and that luck catapulted him to success. He is forever enshrined on the wall of winners in Vegas – regardless of how he got there – but it could easily have turned out differently for him.
Risk management in options trading is my number one rule that I always follow. It should be yours too. Never forget that putting your money at risk makes you vulnerable to market movement and emotional swings.
Before you sit down to make your first trade, you must establish rules of risk tolerance that will keep you in the game. NEVER go “all in” on one play – options, futures, stock, poker, black jack or anything else.
One easy way to manage risk
Only trade with a set amount of cash and keep some dry powder (cash) in reserve.
Here at Explosive Options, we allocate no more than 2% of our cash per trade. That might not seem like much, but we do many trades at once. This rule of thumb allows us to participate without risking everything. When you have cash available, you will avoid the precarious position of “hope and pray”.
All option and stock traders should establish rules to manage their accounts accordingly. Discipline and control trump all else in this game of survival, and isn’t survival what it’s all about?
There will always be an element of chance in trading, because the future is unknown. But unlike poker, you do not have to place extreme bets to be successful. Strauss got really lucky when he found that lone chip, but that is highly unlikely to happen to you – or me.
Stick to your rules, practice sound risk management in options trading, and you’ll live to fight another day.