Saturday, January 9, 2010

Re: [TheOptionClub.com] I have paid more than my share of dues in these markets

 

Hi Rob,

>> You plan for war in times of peace.

My own way of saying this is:

You buy an umbrella when it is peak summer, and not when it is raining cats and dogs.

>> Personally, I'm worried about a black swan event occurring some time this year. What >> are you experienced options traders doing to protect your trading accounts from potential >> overnight max loss in each of your positions.

I do not consider myself as an experienced options trader but will offer some comments.

In my opinion, the best way to combat an unpredictable black swan is to look at the "total value at risk" in your portfolio at any given time. If this value is at a level that you can sleep peacefully, you have potentially taken care of the event. This, of course, means that you have less capital "working for you" at any given point which may reduce the potential reward. At the end of the day, we have to find the right balance between risk and reward in our account at all times.

The second way to do this is to buy some OTM puts in your account but this is like buying any type of insurance which costs money. If you can trade in a way that a part of your profits can be used to buy this insurance, you have effectively taken care of the black swan event.

The third way to do is to do something like what Micheal does (i.e. trade the trade) and transform your positions in a way that you always end up with some long OTM puts in your account (which are funded by the sale of ATM options at different times).

I am truly looking forward to others' comments on this (if any).

Cheers Vikas    




On Sun, Jan 10, 2010 at 11:59 AM, RobertH <robhansen5252@hotmail.com> wrote:
 

Vik, I couldn't have said it better. I'm a big fan of Dan Sheridan, and his mantra is to treat options trading like a business. He's come up with numerous examples to emphasize his point. One of my favorites is a guy opening up an Italian Beef Stand in Chicago. You don't just open the doors and HOPE people come in. You have to have a plan in place. HOPE is the emotion of losers in the markets. You plan for war in times of peace. There is no HOPE involved. You put on a position and know exactly what to do under any circumstance.

Personally, I'm worried about a black swan event occurring some time this year. What are you experienced options traders doing to protect your trading accounts from potential overnight max loss in each of your positions. I love knowing ahead of time how much a particular position can lose, and also knowing that you can adjust or just get out if things get hairy. However, there are always those long weekends when anything can happen. Any thoughts?

RFH



--- In OptionClub@yahoogroups.com, Vik <vikas.basantani@...> wrote:
>
> Paul, you may not like this but your two statements are contradictory in
> nature...
>
> If you have done trial & error and are sufficiently educated, you wouldn't
> be HOPING for the market to stay where it is. I am hoping you will take this
> in the right spirit and will understand the "true" meaning of my comment.
>
> Good luck!!!
>
>
> On Sun, Jan 10, 2010 at 4:25 AM, paul7313 <paul7313@...> wrote:
>
> >
> >
> > now I expect to reap the results of my education and trial and error.
> > just hope the markets stay the same
> >
> >
> >
>


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