If you search through the Options 101 and Trader's Corner archives, you'll find several articles relating to the emotions of trading. That's because trading decisions can be even more complex for options traders than for others. We have to be right on our timelines as well as right about our theories of what will happen with the markets. We don't take home a prize if the markets go right where we thought they would the day after
options expiration, do we? That complication heightens the emotions that arise with any trading decisions, I believe.
A recent question addressed to the "Ask the Experts" section Expiring Monthly brought the topic to the forefront again. A self-professed newby options trader held a losing long call position. While asking for help, he labeled his decision to enter the trade "a mistake."
Editor Mark W. made a comment that all options traders should remember: not all losing trades are mistakes for which we should take personal responsibility. The setup might have been well thought out and the execution impeccable, but the trade just didn't work out. The newby trader's question related to some of the ways he might correct his mistake, but he wondered if he should make the painful decision to let the trade go. We've all been there. When we feel guilty, stupid, you-name-the-bad-emotion for entering a trade, we desperately want to bring the trade around. It's hard to let go. When we're truly convinced that we're pretty good traders, we have a good trade setup, and that the markets are going to render all that work useless from time to time, it's easier to let go.
It's hard to arrive at that point in one's trading and hard to stay at that place once you've arrived there. If the newby trader hadn't been thinking in terms of having made a mistake, more objectivity might have been possible. That trader might have found it easier to let go of that losing trade and move onto another one that made more sense, rather than expending money, time, and emotion on a losing trade. This isn't a trait exhibited only by newby traders, however. Experienced traders who thought themselves well past such attitudes may suddenly find themselves swamped by them again. They may attempt all kinds of ways to get beyond what they deem excess emotion attached to trading. They may be going about it the wrong way.
From time to time, I've written about some of my own efforts to remove as much emotion as possible from trading. The more I learned, the more I realized that I was going about it the wrong way. Let's face it: it's impossible to remove all emotion from trading, and we can drive ourselves wacky by feeling disappointed in our inability to eliminate all emotion when trading. That's silly. Last year, the brokerage Think-or-swim sponsored a series of talks by Denise Shull, a researcher into the neurobiology of emotion. Shull advises that it's impossible to eliminate all emotions attached to trading. Our minds recognize that the statistics of trading--that touted high probability of profit on an iron condor, for example--isn't like that proven in a physics class but is rather more shifting than that. It's more akin to a sports expert guessing the outcome of a game or tournament. Once we enter the trade, we feel those statistics shifting underneath us, like sand beneath our feet.
Shull offered techniques for dealing with losses, many of which I discussed in a September 17, 2010 article. None of those methods involved squashing all emotion. We can't squash those guilty feelings entirely, but we can take steps to deal with them.
That prior article addressed some of the steps that I was taking at that time to overcome the guilt of a larger-than-expected loss I'd experienced in the spring of 2010. That article had mentioned that Shull's "first consultations with traders often uncover people who are not getting enough sleep, nutrition or exercise, all of which impact their trading decisions." I began making efforts to get back to my prior more balanced attitude toward trading so that the stress didn't create situations such as those Shull described, in which lack of sleep and other contributing factors impacted my trading decisions.
Only I had the cause and effect backwards, as it turned out, and maybe some of you do, too. Without dwelling too much on the details, it turns out that I have an autoimmune disorder that impacted my energy level and sleep habits, along with other symptoms. The emotions attached to trading weren't causing stress-related symptoms such as those. The illness I had produced those symptoms which then lessened my ability to handle trading with equanimity. While I was castigating myself for not controlling those trading-relating emotions and making saner decisions, the illness I didn't know I had gave rise to those problems. It likely impacted my trading decisions negatively, too.
I had attributed these to my inability to control the emotions related to trading. As soon as medication began to control the autoimmune disorder that was diagnosed, those physical symptoms that I attributed to stress went away, too, and trading decisions were again easy to face with some equanimity.
My message isn't that, if you're struggling with the emotions of trading, that you probably have an undiagnosed illness. I'm not suggesting that the "Ask the Expert" questioner is probably ill. That would also be silly. However, my message is that you shouldn't underestimate the impact of an illness or stressful life event or work situation on your trading decisions. Option trading doesn't leave us the leeway to recuperate because our trades are so time sensitive.
If you're facing an illness, surgery, increased work load, divorce, or any number of challenges that will decrease rest and relaxation time, your ability to handle the emotions related to trading will be impacted. Trades should be smaller, if entered at all. Consider temporarily ratcheting RUT trades down to IWM trades; SPX down to SPY trades, for example.
Some options trades stretch across weeks. What if you're already in a trade when such a situation arises? Can you cut down the risk by cutting the number of contracts? Can you hedge the risk by adding long calls or puts or by buying back enough sold calls or puts to even out the delta risk? Is it the type of trade that can be managed by contingent orders? While it's usually a good idea to work orders manually, if you're not in a good place emotionally or physically, it may be better to set up contingent orders when you're feeling at your best and most rested, and then let those orders take over for you at the times when you're not feeling capable of making good decisions.
Would it even be prudent to close the trade if there's a small profit or even a small loss rather than risk letting the trade get out of hand when you're physically or emotionally compromised? Consider the trade's possible risk and the impact of dealing with that risk on your ability to deal with your physical or emotional setback.
This article started out with Mark W.'s comment that not all losses are due to mistakes. Sometimes the markets deliver us a surprise after we enter the trade, no matter how well planned and backtested that trade was. Sometimes life does, too. We may have to make adjustments due to life situations just as we would due to unanticipated market behaviors.