Theta Trend

Sometimes when you play in the market you get hurt.  Monday, August 24th and the days leading into “Black Monday” will inflict a good amount of pain on many market participants.  I took a bunch of pain in my Iron Condor positions, but, fortunately, my $RUT Butterfly is doing okay.  Those little options bugs are damn resilient.

Whenever we lose money trading it’s easy to think that things went wrong.  Seriously, it sure feels like things are going wrong when you lose money.  The reality is that trading isn’t that simple.  We can lose money and still have done the right thing, but emotionally that can be hard to remember when the market is crashing, Cramer is begging you to hold on, and your 401k is evaporating.

Rather than sitting around feeling sorry for ourselves or getting mad at the “irrational market,” we should try to learn something from what went wrong.  The lessons below are written with options traders in mind, but they really apply to all traders and investors.

The market is a great teacher and, if you let her, she’ll teach you more than you ever thought you could learn about yourself.

1.  Yeah, it’s really happening

When things get really ugly, you don’t want to look.  I know that when I’m going to open up my software to see a nice loss, I’m not exactly giddy like a school girl on Christmas morning.  Frankly, it sucks, and that’s okay.  Just get in and see what’s going on because avoiding the carnage won’t make it go away.

2.  Getting excited does you no good

Once you’ve gotten yourself to acknowledge that things aren’t exactly optimal, it’s a good time to relax.  When I get stressed, I can physically feel my shoulders hunching up to my ears while my breathing gets shallow and tense.  Don’t do that.  It doesn’t help.  Breathe and realize that you can deal with the situation.

Some people tend to get mad at the market when things go against them.  I’ve never been one of those people, but I’m generally not an angry sort of guy.  If you are one of those people, don’t get mad at me for telling you this:  that doesn’t help either.

3.  Find the dirty stuff and get ready to clean house

Ideally you had a plan in place for your trade when you took it.  You did have a plan right?  If not, you have a bigger problem.  With you plan in hand, go through your inventory and look at what’s broken.  If you have positions that are badly damaged, this might not be the best time to repair them.

Note:  If you aren’t already in a trade, this might be a great opportunity.

4.  Closing is a valid adjustment

As options traders, we usually like to adjust our trades when they go against us.  Sometimes the adjustments work and sometimes they don’t.  It’s always worth noting that deciding to close a broken trade is a valid, and sometimes prudent, adjustment.

5.  Watch and plan your exit – you’re already down money

On Monday the S&P 500 opened and traded down to 1830 before rallying up to the 1900 level.  That was a huge swing and initially the market was very illiquid and fast moving.  Sometimes the best thing to do in a fast moving market is wait.

When you have positions that were in trouble going into the weekend and the market opens 5% lower, you will be in more trouble.  While that’s not great, recognizing that things are already broken relieves you of the burden of trying to immediately fix everything.  Let’s get real, you can’t.  That’s part of the game sometimes.

Instead of panicking, plan your exit, look at broken positions, and methodically figure out what needs to be done.  It also makes sense at times to sit and watch the market for a half hour or an hour to see how things unfold.  Staying calm matters more than panicking your way out of a bad trade.

6.  Assess what you did wrong

What could I have done better or differently?  I ask myself that every time things get a little ugly.  Maybe I couldn’t do anything better, but maybe I could have.  Maybe I was being a little too slow to act or I should have taken a little less risk when the market started to break.  It doesn’t matter what you did wrong, but it does matter that you identify and learn from it.

7.  At least as important, assess what you did right

We all do things wrong and, as traders, we’ll all lose money at times.  Recognize what you did right going into the situation so you can build on that going forward.  Somewhere along the way I read that we feel the pain of our losses much more than we feel the pleasure of winning.  If you don’t take a little time to recognize what you did right, you’re going to set yourself up for failure (and some low self-esteem that won’t help either).

8.  Remember that losing is part of playing the game . . . just not too much

You didn’t really think that $199 course with a high probability would win all the time, did you?  Sometimes you need to take a loss to continue trading.  Options traders sometimes end up in very high probability trades that they don’t want to lose on.  You can and will lose money trading at times.  Just make sure you don’t lose too much and that brings you back to the idea of having a plan.

9.  Put everything into perspective

Bad stuff happens.  That being said, on most days the market won’t crash.  Over our lifetimes we can expect to see a few market crashes and have some emotionally painful days.  As long as the risk we’re taking isn’t too great, we’ll be around to trade tomorrow when the market isn’t crashing.

10.  Think of the crash as continuing education and plan for the next time

The most important lessons from any bad event are the lessons you allow yourself to learn.  Remember that, bad things are learning opportunities.  We can’t prevent unpleasant things from happening, but we can choose to deal with them constructively and learn from the event.  When the market crashes, it’s an opportunity to learn.  You’ll learn about yourself, the market, and, if you’re smart, you’ll learn what to do differently next time.

Make positive expectancy decisions and be safe out there . . .

Have you learned anything today?  Let me know in the comments below.