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my number 1 mistake is thinking irrationally. i know odds. i understand the greeks. but i still
behave irrationally. not irrationally like throwing money down the drain on calls that will never come close to their strike, but irrationally like “oh, this has to happen because of XYZ, just a matter of time.”
and i’ll keep averaging down into oblivion. or buying high and selling low.
what are some signs i’m thinking irrationally? a few i’ve noticed:
1) i get excited and want to talk to people about the trade. if the trade is so good that i can’t keep it to myself... it’s probably going to shit
2) thinking that one trade is the opportunity of a lifetime. this often leads to loss of realized profits.
3) being so confident in a trade that i don’t even consider hedging
4) thinking “this time is different”
5) thinking about what i can buy if my option hits 10x returns
hopefully by writing these down, i can better hold myself accountable and recognize irrational thoughts before i impulsively act on them. good luck!
Bowl Leader
My answer to number 5 is always more options 😂 until I can retire.
Subject Expert
Here are mine:
I've gotten too antsy with losses and sold prematurely, doubting my confidence in stock movement. Had I held in several occassions would have netted big gains.
I've placed bets further OTM than I should trying to get cheap options, and even getting the correct market movement didn't put me in a good exit position
I wasn't patient enough - sometimes I would try to get in on a rally with calls and have them turn quickly red. Rather, wait for the rally to fizzle out and get puts (or vice versa with a dip & calls).
Ive learned 2&3 after a year of option trading. Still practicing number 1.
wanted to say that i’ve begun to evaluate my decision making and better recognize when i am being irrational.
PwC1, one thing that has recently helped me is to do a lot more spreads. my portfolio isn’t moving as violently and i don’t have massive ups and downs that affect my mood as much. higher potential for fomo, but as long as you act on it with a spread, you won’t feel like a worthless dumbass if your trade goes south.
Thanks OP. Much appreciated, I was doing a lot of averaging down which is basically just compounding dumbassery. I went down about 25% last week so I think I’m just not going to trade for a little while. Any advice on getting over losses haha (all of it was just loss of profit luckily, cashed out my principle a few weeks ago)
Bowl Leader
Buying naked calls and puts and not paying attention to IV. Learned that outside of investing within the past 2 months as I was concerned with the expensive premiums everywhere. If you go back to 2019 and most of 2018, IV has been riding low for a long time so it’s hard to apply the lesson until you’re in the environment. It was a huge change to my trading strategy especially in periods of high volatility like now, but it’s been immensely profitable.
Mentor
I learned a long time ago (been trading options for >15 years) to set a loss maximum on every trade and close when I hit it. The few times I would have made a lot by holding are outweighed by retargeting retargeting the capital to a better trade.
Also learned to never look down on a profitable trade even if it would have done better had I held it. I usually put the money to work on another good trade.
I learned the hard way an old maxim about options: "those who trade out of the money are soon out of money". Having intrinsic value allows you to recover from sudden moves and not pay for timing. They ALWAYS look so sweet just sitting there...
Mentor
For a vertical spread, I usually have about a $1.50 credit on a $10 spread. If the spread value to buy it back gets to $3 I close it.
For a diagonal spread I close when the trend reverses. I open with the long at about 60. If it drops below 50 I close.
I’m working really hard on A.) not letting my positions consume me and B.) not making rash decisions in a desperate attempt to clean up a mess. Just because something has worked in the past doesn’t mean I need to double down. You can’t outhink the markets, they are irrational and we are humans.
Addendum: personally I’ve realized that a trading can lead to toxic/unhealthy behaviors/large emotional swings. I don’t like this aspect of trading, so I’ve cashed out most of my profit and I am planning on stopping trading soon. I feel as though this part of trading isn’t talked about enough, so feel free to discuss below with your experience in this regard