In    the   options   universe,  there  are  plenty of traders who are happy to share a new strategy that has either worked well for them in the recent past, or  has   backtested   splendidly over an extended period of time.  Regardless of whether these strategies have been developed by competent veteran traders or newer traders who have not experienced every type of market condition,  I’d strongly suggest that you   take things very slowly when adopting a new options strategy, no matter how successful it has been for the trader who has presented it.  Why?  Here are five good reasons:

1. Every trader is a little bit different. Some   have a high risk tolerance while others are highly risk averse. Many strategies only work if you have a high tolerance for risk . Adopting a successful strategy that does not fit your risk tolerance personality is a failure formula.
2. The trader may be on a lucky streak.  Some strategies actually have no merit. It’s just that the trader has adopted an  approach  which   has  just luckily worked out several months in a row.  These strategies have a short shelf life, and you’ll find that  if you check with the trader several months later, that he or she has abandoned the strategy completely.
3. The trade was only suitable to a certain market condition. A lot of times a trade is legitimate when certain market conditions exist and will fail in other conditions. For example, some strategies tend to do much better when market volatilities are high, but fail when they are not. It’s possible the trade has been successful because it was traded  primarily during high volatility periods and is destined to fail when volatilities return to normal.

1. The trader may never have traded the strategy with real money! I’ve seen traders   enthusiastically   presenting concepts that have never actually been traded with live capital. They are purely theoretical concepts  that have been   backtested   and   paper-traded   at most.   Neither you nor the trader himself have any idea how the trade would really play out under live conditions, with real money at stake  and real execution issues that backtesting  and  papertrading  will not make apparent.
2. There are nuances that no set of “rules” can capture. Most solid strategies have a set of rules or guidelines that are followed by the trader who has developed the approach.  However,   NO set of rules can capture every issue that can come up in the course of a trade.  A  trader experienced with a particular strategy  may make battlefield calls that would not be reflected in a set of guidelines and can  definitely make the difference between a profitable trade and  and unprofitable one in any given month.

Having said all of that, it’s healthy to adopt new strategies, adding  arrows to your quiver of options trades. Next  time we’ll   talk about a common sense approach to incorporating  new ideas into your  mix of options strategies that you actively trade.

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