Achieving Mastery in Trading Options through Longevity

By Joe Duarte

Longevity is all about developing patience and staying power and showing up to work every day. In order to do that, you have to stay on top of your game and develop a consistent routine that allows for the inevitable changes in volatility and market trends. Bull markets can run for years, and volatility conditions can remain stable, but things can change in a hurry.

To prevent burnout and heartburn, expect to incur additional losses when markets transition or when implementing a new strategy. Managing risk by using limited-loss, unlimited-gain strategies whenever possible sets a foundation for longevity.

Paper trading provides a technique to minimize learning curve losses. A second method is through proper position sizing. By starting out with smaller initial positions, potential losses are manageable. Adding rules that include profit-taking is the icing on the cake.

Successful trading does not happen overnight. Be prepared to spend time making low-cost mistakes, observing different market conditions, experiencing varying levels of emotion, and developing your trading skills.

Determining appropriate trade sizes

There are different techniques available to identify proper trade sizes. Many are beyond the scope of this book simply due to space constraints. Two easily incorporated ones include the following:

  • Identifying a maximum dollar amount allocated per trade

  • Identifying a maximum percentage amount allocated per trade

The latter may make sense because it automatically changes as your account size changes. On the other hand, there are some markets that may be best traded using the former approach. It’s always a good idea to keep your options open, especially if you’re having a difficult spell when your strategies are not working as well as they have in the past.

Because options represent a leveraged position, you don’t need to allocate the same amount of money to option positions as you do for stocks. In fact, it’s probably not a good idea to do that at all. Using your stock allocation plan as a base, you can estimate an initial allocation amount by identifying an option position that controls the same amount of stock. This serves as a starting point that should be tested and reviewed.

Establish trade allocation amounts prior to analyzing a specific trade. You need to know in advance the maximum amount available for an individual trade so that you minimize your account risk.

When trying a new strategy (after paper trading), further reduce trade sizes so mistakes are more forgiving. If that means trading in one-option contract sizes, so be it. Remember, you’re not out there to impress Wall Street with your trade sizes — you’re out there to make money in the markets.

As your skills develop, increase position sizes to those tested allocations. This will improve profits because option trading costs are often higher than stock trading costs from a percentage standpoint. If you’ve properly prepared and continue to manage your risk, increasing position sizes shouldn’t be a problem. In fact, it should improve results because you’ll realize economies of scale with trading costs.

Emphasizing profit-taking

Throughout this book there’s an emphasis on managing risk. In this ­chapter, though, there’s an additional emphasis: profit-taking. It’s not enough to simply have a high number of profitable trades. Your profits must:

  • Exceed trading costs.

  • Exceed conservative investment approaches.

  • Exceed your losses.

This doesn’t just happen out of the blue. You have to have a plan that includes reviewing strategy and trade results to put the best profit-taking rules in place. Such rules should minimize the number of profitable trades that turn into losses and allow profits to run. Developing these skills means you’re evolving as a trader.

There are a lot of different price points that can invoke an emotional response while in a trade. Be sure to identify exit points for a loss as well as exit points for profits.