All great options strategies will have losing months.\u00a0 There is no getting around this simple fact, and it is\u00a0critical to your mindset as a successful options trader that you accept these months as part of the game.\u00a0 While non-directional options spread strategies are also known as “income options trades” (giving some traders the mistaken idea\u00a0 that the strategies will produce\u00a0 income for the trader each and every\u00a0 month), it is important for the developing\u00a0 trader to understand that it is rare to go through an entire year utilizing a particular strategy, without at least one losing month.<\/p>\n
In fact, there are certain points in\u00a0 particularly tough trading months where the skilled options \u00a0 trader \u00a0 actually intentionally\u00a0 places \u00a0\u00a0 a trade into a position \u00a0 in which it has\u00a0 no chance<\/strong> of ever producing a profit.\u00a0 This is normally done in order to put the trade into the best possible position to minimize<\/strong> the size of a loss in a situation in which\u00a0 there is almost a\u00a0 statistical certainty that\u00a0 a trade will produce some<\/strong> loss anyway.\u00a0 In other words,\u00a0 there are cases where it is smarter to lock in a small loss than roll the dice on the remote\u00a0 possibility\u00a0 of a small gain at best,\u00a0 contrasted against the distinct possibility of a large loss.<\/p>\n Once a\u00a0 trade is recognized as a\u00a0 probable loser, \u00a0 the skilled options\u00a0 trader can often greatly minimize the size of the loss by restructuring the trade so that the time decay of\u00a0 the short options in the restructured trade allows the loss to be worked down to a very small percentage of committed capital with a minimal risk that a large loss will occur.<\/p>\n The mistake that many developing traders make is that they\u00a0 throw in the towel on a trade which has been adjusted so often that the remainder of the trading cycle\u00a0 does not present any realistic\u00a0 opportunity to turn the trade into a winner. Unfortunately, that is usually the worst<\/strong> time to end the trade, but traders often fail to recognize that. They think, “Now it’s hopeless, I have no shot at making money on this trade, I better just shut this down”.\u00a0 Instead, the correct thought process is: “This trade now has no prospect of turning a profit–is there\u00a0 a way to position my trade so that there is an excellent chance that I can greatly minimize the loss?” Usually there is a way to do just\u00a0 that once you have become a little more experienced.<\/p>\n So\u00a0 for example, a trader\u00a0 may\u00a0 find himself in a situation in which\u00a0 he\u00a0 is \u00a0 down\u00a0 8% on a trade \u00a0 which has been adjusted so much that there is only \u00a0 a very small remaining\u00a0 prospect of making\u00a0 even a\u00a0 2% profit, but a\u00a0 statistically significant\u00a0 possibility of a maximum loss\u00a0 (let’s say 15% in this case).\u00a0 Many developing traders will\u00a0 fail to see that there are many viable ways to reduce the loss down to 2-3% on the trade over time, and simultaneously cut the risk of a maximum loss significantly, if the trader is willing to restructure the trade so that the best case scenario is,say,\u00a0 a 1% loss.<\/p>\n Most developing traders have a psychological block against thinking along those lines. “Why should I guarantee myself a loss?” the trader\u00a0 asks. \u00a0\u00a0 Instead the trader will either bail out of the trade completely at the 8% loss level\u00a0 or, worse, stay in the trade to try to get “lucky”\u00a0 by making\u00a0 the improbable 2% gain,\u00a0 while risking the much more probable\u00a0 15% loss. It’s far smarter to restructure the trade into a guaranteed small loss as a best case scenario in exchange for making the maximum\u00a0 loss extremely unlikely, and a very small\u00a0 loss very likely.<\/p>\n It’s actually really important to recognize when you are in one of those unglamorous situations where your best case scenario is a minimal loss.\u00a0 If\u00a0 you are involved in\u00a0 one of those trades and\u00a0 you try to be a hero by hoping to squeeze a tiny improbable gain out of\u00a0 trade much more likely to end up as a maximum loss, then your chances of\u00a0 making\u00a0 an excellent\u00a0 annual\u00a0 return using\u00a0 that\u00a0 strategy becomes bleak. If, on the other hand, you handle those months right and keep the losses down to a minimum,\u00a0 you put yourself in an excellent position to make a terrific annual profit.<\/p>\n Seth Freudberg<\/p>\n Director, SMB Options Training Program<\/p>\n","protected":false},"excerpt":{"rendered":"