What is a Conservative Options Trading Strategy?
Published on October 5, 2010
Published on October 5, 2010
Recently there was discussion on OPDiscussion forum regarding conservative vis-a-vis aggressive option trading strategies. This is something that as a trader we face day after day so I thought why not I share my thought with the broader readers.
Though there are obvious aggressive and less aggressive strategies, there are a few things that one needs to keep in mind-
1) Overall Market Environment– This is a hidden but obvious force. What you might have thought as conservative strategy requiring little or no adjustment was probably a gift from Mr Market as he decided to stay calm during that period.
2) Knowledge level– Strategies, where one knows inside out, knows how to adjust in any circumstances and could do so even while sleeping will find such strategies to be conservative. I may find directional trades to be conservative as might have “proven” technical analysis expertise. Or I might find cash secured puts as more conservative as I might be a fundamental investor. I may find special opportunity as conservative because I am arbitrager, etc. Investing in 2009 for me was conservative when a lot of stocks were selling almost $0.30 for every dollar and div yield over 10-12%. Some even selling below NTAV when I shared with OPN members e.g. ZINC. While others were scared to touch stocks, there were obvious deals where you could lose nothing. One such trade was ASH/HPC merger in 2008 which we traded together with OPN members; all you could get was a cash for almost no risk.
3) Capital Level– This is one of the parameter we forget once we rise above the levels where we tend to be nervous. For example- one may find trading only condors a aggressive strategy when the capital is 10k, he/she will be nervous with every move of underlying. While the same person, may allow little more time for the trade to work when the “nervousness” isn’t there and is aware of #1 and #2 and risk is properly taken care or mitigated.
Naked put selling is supposed to be a risky game- but guess what Warren Buffet (the world knows him for stocks but I consider hims to be equally smart in options trading) had been doing when the IVs were rising.
4) Experience– I am not including risk/reward because that’s subjective as well. Once the #1, #2 and #3 are done, with experience, we tend to embark on our own investment journey. There is no price tag for experience. A newbie won’t know what is a bear market (and many don’t know even today, 2008 wasn’t really a classic bear)…a newbie won’t know how palms start to sweat, legs starts to shiver and nights turns into nightmare when the portfolio starts to crack and screen drowns in red sea.
There are NO SECRETS to trading success. It’s the extra mile that we walk for every trade, extra degree that we add to business’ success. No one will be profitable all the time. No strategy will be conservative all the time. And there is NONE called EXPERT in the markets. Markets can humble anyone, anytime. Trader is somewhat like a swimmer. Swimmer is not beyond Water but an experienced swimmer knows how far to go, which water to swim into, when and how to either stop or maneuver…
It’s about Discipline, Flexibility and Patience. Market success is truly a journey and we’ all evolve our own trading style over a period of time, which determines what’s conservative for us and what’s not…
Explore your trading journey,
Profitable trading, OP