Happy holidays to all my fellow college basketball fans!
After a much-needed day off, last night I watched my team, Villanova, take on Winthrop in the first round of March Madness …
And it was a little closer than I liked!
Anyway, while I intended to enjoy a 24-hour period of total relaxation, when you live and breathe options like I do, it’s hard to mute that internal trading dialogue sometimes … and last night was no exception.
As I watched the game, I couldn’t help being struck by the similarities between successful basketball teams and option traders.
Specifically, in how they approach the game — and how they make those halftime adjustments.
So today, I’d like to outline some common denominators that can separate the wheat from the chaff, both on the court and in the option pit.
There are several things one needs to succeed in both games, and the first is the most obvious: skills.
But how do you develop those skills?
Well, you first need an understanding of the fundamentals — the basic rules of the game — and then it takes practice, practice, practice.
The most promising young basketball players don’t just practice with their teams… they play every chance they get. They have a DRIVE to hone their skills and be the best.
In options trading, it also takes lots of drive and practice — and unlike basketball, where your only goal is to get the ball in the hoop more than your opponent, THIS game has layers and layers of complexities, and several ways to win.
So if you’re just starting out in the options world — or maybe you’re exploring a new strategy you’ve never traded — it doesn’t hurt to get some practice by paper trading first. TD Ameritrade’s Thinkorswim platform has a Paper Money option, for instance, as do several other trading platforms.
Which brings me to…
Gotta have the right tools to win.
Along with general trading platforms and charting software — I personally like LiveVol — stock and option traders have a plethora of indicators at their disposal.
Every trader is different in which “signals” they put stock into; some execute trades on moving average crossovers, for instance.
After basically growing up on the floor of the CBOE, my finely tuned toolbox includes my proprietary Option Pit VIX Light, and I keep tabs on Robinhood metrics and unusual options volume, among many other things.
Basketball players also need the right tools to succeed — like speed, agility, a good pair of sneaks, and an ability to read the court.
Perhaps the most important common denominator between successful athletes and option traders is the ability to make adjustments when things aren’t going their way.
A team can go into battle with what looks like a concrete game plan, but if they’re getting smoked at halftime, they have to adapt or die.
It’s the same thing with option trading; sometimes you have to call an audible.
For instance, if a position isn’t going the way you expect, or maybe your prediction is taking longer than anticipated to play out, you might consider rolling your contracts to a series with more shelf life, or to a strike or strikes that make more sense with the underlying price action.
Or, maybe you have a bullish position you’re worried about, and manage risk by putting on a protective put position to act as options “insurance.”
Sometimes you may decide to lock in partial profits on a winning position, and let the rest ride, and other times you may decide to cut some of your losses.
The key is being flexible, attentive, and reactive — not stubborn — about your open positions, and then ultimately winning more than you lose.
A Great Coach
Finally, every professional athlete has at least one coach that made a difference in his or her career.
In the options game, having a mentor is extremely important.
In fact, I’d venture to say that many stock traders who begin to dabble in options quit relatively quickly, simply because they don’t have the right training and leadership.
A great coach will not only teach you the game, but to LOVE the game.
He or she will help you build the RESILIENCE you need to overcome losses — and there will be losses — and learn from your own mistakes.
Now … back to watching hoops!
Your Only Option,