Don’t Confuse Luck with Reality

Sandy superstorm is one of the biggest natural disasters to have struck east coast during recent times. My Prayers and Best Wishes for all the people in the Sandy’s Path. I wish all a safe stay and speedy recovery of the places affected by this storm.

As superstorm Sandy slams east coast, it’s leaving floods, millions without power across the US east coast. New York Stock Exchange (NYSE) and Nasdaq remained closed for the 2nd consecutive day. This is the first time since 1888 that the exchanges have been closed for two consecutive days because of weather. First time since 1888!! This “once in more than 120 years” event puts this into a “Black Swan” category. GOOG earning announcement during the mid day for “whatever” error probably was another event (impacted mostly GOOG trader’s though). But haven’t you noticed that Black Swans have been seen rather too frequently these days?

Some will blame poor results to this “once in generations” event, while others who benefit from this event will pat their shoulders for outsmarting the markets (while the truth may be something different).

My friend and I had a significant position on Google earnings alone (personal NON-OPN portfolios) when the earning news broke, and our portfolio took a sudden beating. By the next Friday close, however, we converted into green but it was quite a task! Though I don’t underestimate power of luck, this conversion to green did require a lot of manoeuvring, adjusting, capital consumption etc. (topic for another article) and was hugely stressful to say the least.

Let’s not confuse luck with reality. Unpredictability and uncertainty are the norms of the day.

Sandy Superstorm is a reminder. This is one of one of those times that one should evaluate his strategy tool box rather more thoroughly.

• Is your portfolio built upon strategies that let you sleep peacefully even if the market is closed for time comparable to documented past?
• Was your capital allocation right?
• Did you know what you were trading and what can affect your results when you invested that capital?
• Was chasing alpha the priority or preserving the capital?
• What was the risk management plan?
• Were you in touch with what was happening? (there were several reports by Friday close that Sandy is not normal)

Going into weekend, I was trading only two underlying for earning events i.e. SWKS and BIDU (when there are so many companies reporting earning, than why only two? to be discussed some other day). SWKS was for OPNewsletter and BIDU for personal portfolio. I was in BIDU trade since Oct 24th via straddles (screenshot of first trade attached). But going into the weekend, I converted that into a double calendar by selling strangle from the front week (a strategy I have been using for very long time). BUT premium gain wasn’t the point for conversion, the point was to PRESERVE CAPITAL of the long strangle for a “weekend what if”. Markets are closed today while BIDU already announced earnings as of yesterday. Had I been only in strangle/straddle (original trade), I would have been sitting on losses as Implied Volatility would have plummeted. Double calendar would reduce risk significantly and in fact increase the probability of success. I am now waiting for markets to open so as to close the positions but I am glad that my capital isn’t going to take a hit because a black swan flew over the weekend. I was lucky to have done that “what if”.

So what’s the bottomline?

Know what you are doing and know it well. This is even more important if you are trading options as options have limited life. There are no short cuts in trading. It’s hard work and requires continuous sharpening of the saw. It’s one of the toughest professions. Get real. Will you be right all the time? No. But try to increase the occurrences of being right.

At OP Income Newsletter chasing alpha is NOT the aim, profitable growth is. 

Just to restate, subscription are currently open and there is no wait listing fee. The objective is still the same as it was 60 months ago i.e. 5-7% monthly gains. OP Income Newsletter is NOT a GET-RICH-QUICK-NEWSLETTER. The market neutral and volatility strategies that we trade are scalable and diversified. Try it completely RISK FREE i.e. there is no subscription fee for your first month if OPN doesn’t make money

Take care and continue to sharpen the saw, continously

Profitable Trading, OP