Barry on Navigating the Emotions of Stock Options Trading

Posted By Barry Brush |  Subscribe in a reader | Comment 0
2DIME’S INVESTOR NOTES
Wednesday, December 12th, 2007
 
 

“You Have the Option to Remain Silent.”

"Any Emotion You Display Can and Will Be Used Against You On the Trading Floor."

so…. “SNAP OUT OF IT!”

I have heard it said that "Trading is as much psychological as it is skill."  I personally think it is much more psychological than skill because much of the skill consists of being able to control the emotions which are along for the ride on every trade.

If you trade for a living like I do, you understand full well the psychological ups and downs which accompanied last months 10% correction. Control of them was the key to eking out a pay check.

As for myself, an ex-fighter pilot, having graduated from a career with a commercial airline, I’m supposed to have superior skills in emotional stability and control.  I used to get paid to take hundreds of people from point A to point B without ever needing to see the ground or the sun, and often two or more hours from the nearest landfall.  If  I preflighted the aircraft and properly planned for the flight, i.e. made sure I had enough gas, and precisely followed a checklist from start to finish, I always reached my goal; 100% of the time. Well, .. maybe not 100%, but close.

In my new career as an options trader, the trades I make are not exactly like that; but one can draw a tight parallel to the emotion involved.  The checklist I run now before I place a trade runs something like this. I pick an equity that is fundamentally above average. I preflight it to verify it will take me to my planned destination. Earnings and Sales Growth, Accumulation and Distribution, DELTA and then, just like every trader I know, I make my pick jump through a series of technical hoops based on price pattern, position and volume before pushing the thrust levers up and putting my money on the runway in harms way.

Usually all goes well and the flight to prosperity continues;  but every once in a while a malfunction occurs, usually a direct result of an overlooked piece of analysis known as a glitch, a screw-up or simply a mistake.  In the cockpit, we used to say if you screw something up unscrew it as soon as possible. When things go wrong what can we do?  We bite the bullet. We accept responsibility and take the appropriate action. Exit the trade to preserve capital. Then, we reflect on the cause so as to avoid it in the future.

As simple as that? What about that emotional fog of doubt that lingers? What do you do with that? What do you do when you start talking to yourself and beating up on yourself.  Thinking to yourself, Oh! I screwed that up, or You dumb a–!  Or why did you do that?  What will he/she think of me now? I was really stupid to gamble that way!

Unfortunately, these thoughts can only be escaped through experience and the emotional battles you win over time. My advice to new traders is to never ever think badly about yourself. You are your own best friend and the best asset you own. You are an excellent money manager!  And well, you’ll be rich! Nothing else is acceptable.

If it were simple ………;but it’s not, is it? Those things called emotions; Greed, Fear, Hope & Doubt are always lurking. They fluxuate, expanding and contracting over the life of any trade. They must be recognized and controlled to achieve success.

I think that trading options has the potential to be a little more emotionally charged than equities. Options have an innate factor of increased leverage. Their spirit or volatility colors them a little brighter than stocks. Their rapid price movements and fluxuations can “whip” an equity trader in and out of trades with regular frustration. While a 7% stop loss on a stock may be sufficient, a mental 30%-50% stop is often necessary in order to stay with an option trade to maturity. The mental stops I use require continual price and volume technical analysis of the underlying equity. A 5% decline in the stock price can mean a decline to 0% in a near term option. Conversely, a $2.00 move up could result in a 40% – 100% gain. I admit to watching some of my trades go to 0% only to bounce back to a 400% gain. Its pretty exciting stuff; but it can also be a trying, stressful, emotional ride.

I use a couple of tools to put the emotional beast in its place. First, I compartmentalize my emotional thoughts by recognizing them. Then, I substitute or overlay them with information I have learned through my training and education. In Pilot speak, its like flying a Category III instrument approach, where you don’t “know” you are landing until you feel the wheels touch down. Its just like trading where you rely on your knowledge, your indicators and memorized procedures to get the job done. Educate yourself and trust your knowledge. I often reassure myself by saying: “I am an excellent money manager”.

I have to confess that some times those negative thoughts are very resilient. When I started trading, I had to come up with a simple way to combat them and add emotional stability to my trades. I adopted a short cut I call: “SNAP OUT OF IT!” I used it a lot at first. Here’s how it works. It is a physical mind trick I still use today, although thank goodness very rarely. Let me explain.

If you run into me, you might notice I wear one of those affinity rubber wrist bands. My current one says “END HUNGER.” (from some kind of a diet program I think.) It doesn’t matter what it says. What matters is that it stays on my wrist and I can use it to control my emotions. If I ever catch myself thinking one of those negative thoughts, (My favorite is: “You Dumb A_ _ !) I stretch the band about 3 inches off my wrist and let go. OUCH! Then I caress the sore spot and say something like “Well I’ll be rich!” It is kind of a psychological punishment for bad behavior and reward for good combined. It really works. Afterward, I dispassionately move on to do what I am really good at, making a living trading stocks and options; staying cool, calm, collected and rich.

Cheers, 2Dimes / Barry Brush
To contact me send an email by using the Contact form (link above) and Tate will make sure I get it.  The best option is to submit your comment to the blog here 🙂

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