By Josip Causic, Online Trading Academy Options Instructor
I personally believe that there are three stages that option traders fall into. They are: the stage of disappointment, the stage of discipline, and the ultimate stage of trade mastery or domination. Certainly, each of these three stages has various degrees, but for simplicity sake, I will just stay on these three fundamental ones.
In order to explore them in greater detail, I will introduce the guiding question for our discussion: What is success for an option trader? The answer at first might seem obvious - making money / having a profitable trade. Yet is there more than meets the eye in this straightforward question? I would say – yes, for things are often so much more profound than what they appear to be at first sight.
We might think that being profitable is "the" definition of a successful trader, regardless of the instrument that is being traded: options, futures, or equities. Yet, what if that definition is only "a" definition, one of many possibilities, rather than being "the" definition? What if we had placed an option trade, after having clear exit plans for all three possible scenarios pre-calculated? For instance, if we placed a Bull Put spread on a stock after we had analyzed, prior to our entry all three possible scenarios, and then one of the three things happened. Scenario 1 – price action closing above our strike prices equals keeping the maximum profit and having both put strike prices expire worthless. Scenario 2 – price action at the expiry closing below both our sold put strike price and bought put strike price, equaling the maximum loss of the invested funds; self-evidently, an undesired result. Lastly, Scenario 3 – price closing within our spread; in such case, the specifics are needed to be certain as to how big the possible loss would be. However, the loss should not be greater than our maximum loss.
Having presented these three possible outcomes for our Bull Put spread, we turn our attention to the original question: What is the definition of success for this specific trade? It depends. If the trade has gone as expected, the answer is obvious – profit. However, if the trade has gone against us, could we still have a successful trade? Yes. In such case, we have exited our trade for a small loss which was pre-calculated prior to our entry.
Personally, a good/successful trade is not necessarily the one in which I had made money, but the one in which I had followed my trading plan to the last letter without any deviation. Discipline is such a big part of trading and without self-control, it is nearly impossible to be a successful trader. If we are undisciplined and unwilling to follow our trading plan, then we will be greatly disappointed with our unprofitable results.
One must follow one's own trading rules and to trade only one's own money. Both of these two things involve self-discipline. Discipline eventually leads to domination, and domination in the context that I am discussing, means the mastery of trading. Certainly, I am not talking of absolute mastery of the stock market but of personal mastery involving following our own rules. If we "ain't got no" discipline to follow our OWN trading rules, then we will certainly be disappointed about our own option trading results. It is a well-known fact that how we do anything is how we do everything. Harv T. Eker, the author of "Secrets of the Millionaire Mind," was the one who came up with this insight which could be used for any walk of life, option trading included. If we are undisciplined and unorganized in many aspects of our own life, this will show up in our trading.
Disappointment |
Discipline |
Domination |
Losses |
Depends |
Profits |
Figure 1
In the over-simplified chart above, I have presented lack of discipline leading to disappointment, which basically translates into trading losses. On the contrary, having rigid discipline to follow our rules would eventually lead to domination. Again, the one in the middle, just having discipline cannot be clearly assessed because it depends on the specifics. It all depends on what happened to the trade and if it has gone against us and we exited for a slight loss or at the breakeven point.
In conclusion, success equals consistency in following our rules. None of us option traders were born with an innate gift for trading. We all started as lazy option traders. Some traders, who were undisciplined because of their own nature, were never able to move away from the stage of disappointment to the place where they are disciplined enough to do what they said they would – follow their trading rules. Those who are disciplined to follow their rules end up trading for a lifetime. Are you, the reader, disciplined enough to move on to mastery/domination?
Good Trading!
- Josip Causic
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