Trading, Overtrading, and Waiting Part Three: The Waiting Game & The Iron Condor
...Continued From Part Two
The Waiting Game
Patience is definitely a virtue for traders. But what about those times when you donít already have a few nice tradesin place? This last scenario is probably the toughest one for the average trader. After all, watching the days tick bywhile all of your capital is wasting away in your account can bea frustrating experience. Some might even say that it is infuriating!
Having the discipline to wait for agood trade is so difficult that it can be prohibitive for many options users. There are constant temptations to force a trade orto enter into mediocre trades at bad prices. The most likely result offailing the waiting game is revealed when the real action resumes. When the market starts moving again, youíre suddenly stuck with a trade that is too narrow or too risky for the current market conditions. The end result is a trade that is likelyto be a loser.
The Iron Condor & Low Volatility
As far as iron condors go, selling condors in lowvolatility environments is a common mistake that is made by many traders. Unfortunately, these tradersusually end up suffering for their mistakes when volatility pops. That is because the trade is either threatenedor unchanged even after a week or two because of that new volatilityenvironment.
The correct response to unfavorable conditions is to wait.
As WarrenBuffett says: ìRule No.1: Never lose money. Rule No.2: Never forgetrule No.1.î One of the advantages that we traders have over marketmakers is that we donít have to be in the market at all times. Insteadof having to provide liquidity and take the other side of trades that wedon't like, we have the ability to only enter the trades that meet our criteria
This freedom should not be underestimated. Whenever conditions are unfavorable (whether that means lowvolatility, an upcoming market-moving news item, etc.), we canalways choose to wait for the next trade to come to us.
Our members know the importance of waiting because they watch us do itall the time. This month, for instance, weíre about three weeks awayfrom expiration and we only have one position open (we usually trade 3- 5 positions each month). Why? Because volatility has plunged, marketshave rallied to very overbought levels, and we refuse to enter into badpositions just to meet a hypothetical quota. Our members are smartenough to know that one good position is always preferable to two orthree mediocre ones.
The ultimate point here is that itís not enough to be able to recognizegood trades and deploy a strategy. You also have to have the disciplineto avoid overtrading. That means you need the patience to wait for good trades insteadof trying to force bad ones. ìDisciplineî and ìpatienceî may not soundas sexy or interesting as ìnegative gamma riskî or ìexponential thetacurves.î However, those two qualities will take you farther than just about anything else.
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