What I often do with my students is figure out: where is the blind spot? This is the moment where you don't see or don't want to see something important.
In my decades of watching, managing and being an options trader the ball is usually dropped at the "transition" point. The transition is the moment where things change in a meaningful way. Where the picture morphs into something different. Where recency bias wants to prevent you from doing the right thing.
Look at A and B in the picture. "A" feels really easy when you're in it. You're collecting put premiums one after another, like taking candy from a baby.
When the trendline is broken and B starts to happen, all you can think of is how easy A was. And that recency bias of being right makes it difficult to accept that you might now be wrong. You tell yourself that if the stock can JUST GET BACK to where it was in A you'll get out.
The transition is hard. It's where you've made 5000, but potentially need to give back 1500 in order to complete the campaign. Yes, a loss is often the last inning of a good campaign.
And the blind spot is where you don't want to accept taking that loss. And because of option selling negative convexity you give back all 5000 and maybe another 5000 on top of that. And that is why some traders just can't get ahead. It stairs up but elevator down if you're not looking at this the right way.
Watch for the transition, and don't let it be your blind spot. Click here for my lecture on Mindset if you want to know more about why blind spots are even more important to recognize when selling options.
Comments