One of my largest hurdles trading options was establishing a healthy understanding and relationship with trading options.
We MUST take (ideally “good”) risk in order to make money. The paradox: we must also tightly control risk to ensure we can withstand turbulent (subjective to the style of trading) markets. There are two main risk approaches for traders- the cavalier who are risk takers; and the conservatives who seek to avoid risk. As with much of life, striking balance is the goal. We need to take risk, but not too much.
I had an extremely hard time with this early. I started trading early, in high school, where I worked extremely hard in low income side hustle jobs. I did not want to lose what I had been working so hard for. Interestingly, this mindset initially led to death by 1000 papercuts.
It went like this:
-Very conservative early on, trading mostly verticals. Cutting winners too quick. Negatively expectant.
-Few years in, gained confidence, grew size. Took the largest loss (as a % of my portfolio) to date. Negatively expectant.
-This is the real bitch, I reeled all the way back and grew to be extremely conservative again. I was positively expectant, but because of the previous issue, I was reluctant to size in. This was a HUGE hindrance and if I wasn’t able to overcome it, I would’ve been better off in a buy and hold portfolio (nothing wrong with that, just the reality of things).
To finally get past this, I deployed a crawl, walk, run approach (we use this in the military when planning training). I essentially set different goals and carefully tracked my performance, reviewing monthly. As I hit those goals, I would size in a prescribed amount and repeat. This created a more smooth scaling in process. I honed my trading plan, risk management approach. I got to the point where I was comfortably leveraging the portfolio while in the aggressive growth phase. It came down to creating a plan, testing the controls to validate and optimize, thus increasing confidence and being able to deploy the portfolio successfully despite my general risk averse nature pertaining to the trading capital.
Note to my younger self, we can’t make meaningful progress being too conservative and being afraid of risk. We cannot be reckless either. Create a plan, test, refine, and scale in while monitoring progress. Never allow a trade to severely damage the portfolio, but do not be afraid to size into opportunity. Balance.