Monthly Options Spread Trading is a 12-Inning Game

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I’m mentoring a remarkable options trainee named Joe. We’ve been working together for over two years. Joe is remarkable for many reasons, but among them is the fact that he lives in Indonesia and is asleep during the majority of the U.S. options market hours due to the time difference (about 12 hours—we’re talking about half way around the world here!).

I don’t know how else to say it—Joe is a great options trader. He is patient, has boatloads of common sense, follows rules when he needs to, and also knows that rules are made to be broken when common sense and risk management dictates.

Joe maintains an impressive win rate in his options trading record. In fact, it’s one of the best that I have ever seen. And thus, after working with him for years, it took me this long to discover yet another one of his trading strengths: he knows how to lose a trade. Consciously choosing to lose a trade at the right time and for the right reasons is an essential part of being a successful options trader.

In my mentoring session today with Joe, he shared with me his intention to close a trade that he had been nursing along for four weeks. The market just kept breaking against him during the trade, at the worst possible times. In my judgment, every decision that he made during the trade was sound—his process was correct and intelligent. The market simply didn’t cooperate. Mind you, this was a trade that Joe has won more than 80% of the time over the last several years, and most of the time the decisions he made this month would have resulted in a winning trade.

I reminded Joe that monthly, options spread trading is like a 12-inning baseball game. You don’t have to score in each inning to win the game. The annual return of one’s trading is what counts. Losing in any one month is just about as irrelevant as winning in any one month. If your strategy is sound and well-executed, you should win over time. No one ever said you’d win on every trade no matter how skilled you are, and Joe is an awfully skilled trader. The key to a successful options trading plan is to follow it carefully, and get neither irrationally exuberant in a winning month nor irrationally despondent in bad month. I reminded Joe that squeezing four more points of positive return out of a winning trade is just as important as reducing the negative return of a losing trade by four points—which is exactly what Joe was planning to do this morning.

As we build our options trading desk at SMB, I’ll be focusing on two important skills, and both are equally important: knowing how to take profits when that is the right thing to do and knowing when to close losing trades at the right time when that is the right thing to do. One is not more important to the other. Think of them as two sides of the same trading coin!


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