Quote from JSHINV:
I've thought about this comment. Given your experience and perspective perhaps you could give me some further thoughts on this. Are the reasons option traders blow out in your opinion because of the extreme volatility of investment and the resulting panic trading that may occur, even when the trade makes sense in when it is made - supported by the numbers? Does it take a different kind of person to trade in options to stay the course, make reasonable adjustments as needed, and not panic close positions when they are going all over the map? I am by no means judging someone who is not that "different kind of person." Because I am not sure yet if I am that different type of person. Or is it because options are just so unpredictable regardless of one's knowledge and tools that they blow out? I know there are issues of greed, and trying to get revenge on the market. But, I am thinking of this option specific, somewhat psychological question.
Not a technical question to be sure. But, you have a perspective that I do not. You've seen a lot over a period of time.
Thanks.
Well, everything said by the posters in relation to your post here is true and correct. 75%+ of traders in generall blow out - from bonds to options. But in my experience, Option traders - the ones who buy outright, tend to blow out faster than any other type of trader. The reason IMO is because they either rely too heavily on the mathematics involved or rely too heavily on the technical/fundamental analysis involved in predicting direction. In both cases, they fail to balance that against anticipated volatility. With option buying, timing and prediciting magnitude is everything. I learned that early on which allowed me to move from options to futures.
Does it take a different kind of person to survive over the long term in options? Sure, if that different type of person is one who employs proper money management skills, proper analytical skills, and discipline. Each is equally important with options as there is less margin of error. This person has to be supremely dedicated to trading options. Given the high level of risk with option trading, it can't be a hobby. Any one trade going to "zero" in a very short period of time is a very real possibility.
For example. I recall an OEX trade I did about 13 years ago. I was long an ITM (in the money) OEX call. I think it was about $4 or $5 a piece. At the time the options market opened at 9:15 EST. But some news came out @ 8:30EST and the S&P futures went lock limit down. My options opened @ 1/8. Which is essentially worthless. (There haven't been many lock limits recently. I suppose since the trading bands have widened and since S&P went electronic.) Now, I could have had a straddle on which would have been profitable. But by day's end, the S&P-OEX bounced back to unchanged. But my position only returned to approx $2. Because after a big move like that, volatility was expected to shrink near term as prices consolidated and that was reflected in the price. Now, had I been able to trade the futures, a number of things could have happened. I could have had a stop which would have triggered overnight for a small loss. I could have had a margin call which would either end in a forced liquidation or myself having to wire more funds to cover, or I could have stayed put with enough funds in my account. Given my strategy and analysis, I would have been flat to slightly profitable by the day's end because I knew that it was a panic bottom and would not have been shaken out of my position. Just like I wasn't shaken out of my position with the option trade. Even though I was right on direction, unanticipated volatility spike ate up my Greeks. I think it was two weeks or less before expiration. But the next day, I ended up closing the position for $1 or so. It was a ~75% loss. (~40% loss on account equity.) I think that was my turning point.
And that was just one case in point.
Futures wise, I never sustained a loss remotely close to that. I think my largest single loss in futures was 10% of the amount put up. Not my entire account. Which translates into ~1% of total account equity. You could have the same money managenment profile with options, but not with the same accuracy.
Let me say this in closing, I'm not anti-options as options can be a very lucrative part of any investment strategy. But one's investment strategy should not be overweight in options. The perfect balance between risk/reward/leverage/liquidity are certain futures such as E-mini S&P 500 futures, E-mini Nasdaq, and E-mini Russel 2k. And if you're interested in currencies, Euro FX (6E) futures which is the Eur/USD equivalent. All of them trade round the clock giving you plenty of opportunity to fine tune your position or for entry and exit. Not sure you can do that with options. Since last I traded them, there was no overnight trading. Might have changed since then.
