The Scariest Thing About Options Selling
I recently received an email from a trader who wanted to move toward implementing an option selling strategy into his portfolio but was scared to death to actually do so. He then listed a series of catastrophic events (from the stand point of option selling) that could happen that could cause a substantial loss.
His point was completely valid.
The problem, though, is that the fear of an improbable event paralyzes him from moving forward. This is common with option selling and I have mentioned it in this forum in the past. The bottom line is that, yes, something terrible could happen that could cause a significant loss in the account. However, that is NOT the scariest thing about option selling… at least not without different context.
So if the catastrophic event occurring is not the worst thing about option selling, then what is?
Many of you might guess what the answer to this is, especially if you have had any exposure to my work and writings.
The scariest thing in options selling is not a category 5 hurricane hitting our offshore rigs. It is not a massive freeze occurring in Florida destroying all of the orange trees. The scariest thing in option selling is OVERTRADING when the category 5 hurricane hits, or OVERTRADING when the massive freeze occurs in Florida.
There was a well known trader several years ago that got caught in a major market move having sold the wrong options. Millyuns and millyuns of dollars were gone in a very short period of time. The cause of this was not the major move. It was far from catastrophic. It was simply a solid move. Literally, overnight, his massive fund was shut down not because of a catastrophic event, but because of overtrading.
There are two scary things that should be addressed when selling options. The first is the fact that there could be a catastrophic event that could cause serious losses in your trading. That you can’t help. However, the scariest thing is definitely overtrading, and that is a decision that is 100% in your control.
And that is the Truth About Trading.
-Ryan Jones
