There is a common myth and misunderstanding amongst most beginners and relatively experienced options traders that being a "good" options trader and employing advanced sophisticated options strategies, one could get to a point where luck is negligible and that we won't have to consider the impact that luck is going to have. Well, the bad news is this, no matter what options strategy you employ and no matter how well you stick to your strategy and no matter how well crafted your trading plan is, LUCK is always going to be a thing and BAD LUCK can still kill your options trading career faster than you can imagine.
The reason why no matter what options strategy you employ, bad luck is always going to be something that can ruin your day is because of the simple fact that NO options strategy is 100% winning. Every single options strategy in the world wins within a certain parameter and loses within certain other parameters. Even if you have an options strategy that wins 80% of the time, you still have a 20% chance of losing and that 20% chance of losing alone can kill an options trading career really early if the options trader is "unlucky". Yes, for the unlucky options trader, that 20% losing chance seems to hit pretty much 100% of the time!
Have you ever experienced that the moment you buy a rising stock it begins to fall? Of course, this is not purely luck but thats how it feels like to be an unlucky options trader. Basically, an unlucky options trader tends to always use real money on an options strategy and hit right smack on the "20% chance of losing" right from the very first trade. In fact, compared to losing any other times, losing on the very first trade has very very real psychological and portfolio status impacts. It literally takes twice the win to recover the loss on the first trade and the psychological impact usually leaves the options trader very much injured and incapable of continuing the trade in a logical sensible way required by the options strategy. Usually what also happens is that an unlucky options trader also overcommits on that one losing trade thinking that 80% chance of winning is as good as a 100% chance of winning, thus wiping the options trading account right off the bat. The unlucky options trader typically then takes a break from trading, comes back after a while and then repeat the same unlucky cycle all over again. Sounds familiar?
Luck is very much a mathematical probabilistic reality and a mental discipline in options trading. First of all, before declaring yourself lucky or unlucky, you need to be sure that the options strategy you are employing is well crafted. Just knowing you should buy ATM call and sell OTM call when a stock is expected to rise to a certain price within a certain time DO NOT make this a winning Bull Call Spread! So many other factors need to be considered and writtened into a full and complete TRADING PLAN covering everything from the mental principles, the technical principles, the stock selection criteria, the options selection criteria, the entry timing and criteria, the exit timing and criteria, mid trade position management rules, lifestyle rules governing how and when to do what in order to properly manage the position all needs to be covered before you can call your loss something due to luck. Most of the time, its just a badly crafted strategy that caused the loss, nothing more. In such cases, blaming it on "luck" is completely counter productive and completely impedes your progress in options trading skill and knowledge.
If you have checked and made sure that your options strategy is well crafted, your stock picking and technical analysis are all on point and you still lost, then it could be just hitting the normal losing parameter of said options strategy and therefore just "bad luck" of hitting the "20% losing chance". However, there are 2 things you can do in order to make sure that this 20% losing chance do not become a problem.
Be consistent in continuing to trade the strategy EXACTLY as it is designed to do. If it is a well designed strategy and its "80% winning rate" is proven over time, then you are assured that even if you lose your first trade, the subsequent wins are going to be able to make it back up and end you in an eventual net profit. In fact, this is the goal of real professional options trading, not to try to hit a 100% win rate but just to win more than we lose over the long term. The problem with "unlucky" options traders is that they tend to stop after a losing trade, break the rules, time the next trade and unfortunately and unluckily hit the next natural losing cycle of that options strategy once again. As such, losing or winning, you need to apply the same options strategy over an extended period of time in order to allow the winning rate of the strategy to work in your favor and result in a net profit over time.
Proper trade management in terms of how much money to commit to each trade MATTERS the MOST in the long term. Poor trade management will kill your trading account even if you manage to win more times than you lose! For example, you could overcommit on a single losing trade which takes 10 winning trades to just break even. Or you could go all in on a single trade and get wiped out straight away! In the long term, it doesnt even matter if you have the best options strategy in the world if you keep hitting those losing trades with huge amount of your fund. As such, you need to employ a sensible and consistent trade management plan designed specifically for the expected win lose profile of the options strategy you are employing. In fact, such a trade management plan should come as part of the strategy itself and if not, it is NOT a complete options strategy and you are in for a disaster down the road.
As you can see, accepting "Bad Luck" as a living reality is a prerequisite for any options trader! Anyone who rejects the idea of luck in options trading and simply goes by the idea that a high enough winning chance is as good as a 100% winning chance is going to get into trouble really soon. The good news is, we can live with the reality of bad luck in options trading and be able to MANAGE "bad luck" by employing the two simple strategies outlined above. Yes, we can manage luck if we are CONSISTENT in our options trading. Consistent in the execution of our strategy and consistent in the execution of our trade management plan. If you can do these, luck will stop becoming a problem in options trading but just small bumps in your overall journey to profitability and success in options trading.
|Explore options trading insights for experienced options traders : Options Insights For Veteran Traders.