Despite the fact that the guy who got me into the trading business in 1994 had been almost an original CBOE floor member, despite the fact that one of my best trades ever was a covered write on LU in July of 1999 (think sell Lucent @75), despite the fact that the man in my life now is fully conversant in delta, gamma, theta, vega and even thinkorswim software…. I have personally resisted (sometimes actively, sometimes passively), the whole idea of options.
When I think back to when I was first introduced to speculative trading (versus the buy and hold AT&T for a lifetime that my father did) I remember thinking “it’s weird, they are so cheap!” -sort of like I was looking at a pair of Armani shoes priced at $99 and thinking “something isn’t right here“. But that really isn’t why I didn’t do it. I mean after all – all of my best friends were current or ex-CBOE floor traders (ZAP, WAR, SUG, DEO, ) …I ate lunch in the building, worked out in the building, drank coffee amidst the flowers just west on Jackson… but went back to my momentum trading shop a few blocks away to actually trade.
And I guess if anything that is it… I was inculcated with the idea of short-term directional momentum from one of the legendary traders of the time – Steve Schonfeld – and options just seem so damn hedged. Somewhere in my mind, I wasn’t really taking a risk (like that was a bad thing! What real chicks don’t hedge?) …anyway…
Well… I have changed my mind. For a multitude of reasons –
1. I owe Jared Levy – “The Statistician” on CNBC’s FAST MONEY – a chapter for his book.
2. I lost a lot of my capital a few years ago betting on one CEO and one industry that I knew very well (industry and CEO) but I still intend to be living in Aspen in 10 years so I have some ground to make up! Yes I made all the “behavioral economics and finance” mistakes there are to make – confirmation bias, anchoring, framing… you name it. (You don’t think I know all this trading psych stuff because I read it in a book do you?) Without the gory details… let’s just say those cheap Armani shoes make a bit more sense now!
3. Most of all, I am committed to finally finishing my own book – and that takes lots of time … time that doesn’t allow for sitting watching the charts all day to catch intra-day momentum moves on the index futures (something I am, even if I say so myself, rather good at) but does allow for tactical planning at any hour of the day and even better, doesn’t require stops because real option trading – spreads, straddles, iron flying things … have “stops” built in by definition.
… so building my own options book… well that I think I can and now even WANT to do. I have been struggling with my time constraints vis a vis trading, speaking, writing… and options now seem like the overwhelmingly obvious answer. In fact, I think it will be good – I will learn something, I will extend what I know about the brain and risk to a trickier environment and eventually, I will most likely even make money.
See options trading sounds easier from a psychological perspective – after all you have these well-worn models to guide you right? But in reality, I don’t think it is. You actually have more inputs, more possible outcomes and therefore more decisions to make. By virtue of the fact that I am not going to scalp options I will also have more time decay (and TIME) to tolerate… which while it is supposed to be good – a day like yesterday (SEC announces fraud charges against GS) proves that anything can happen – and while theta (that general reality that all options get cheaper with every passing day) may work in your favor, on a day when the market moves seriously directionally (my previously most beloved of all days), theta doesn’t stand a chance.
Stay tuned… options perception, judgment, decision making and anxiety … through the eyes of psychological capital. First trade up … a bullish put spread for either May or June expiration – probably May …”sell in May and go away” after all …