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Joshua Belanger
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OptionSIZZLE is created to help you better understand and become more familiar with options and what the professional traders are doing everyday in the market and provide effective options trading strategies to allow you to trade better and trade smarter. We have found over the years some of the... More
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  • Why Style Drifting Can Kill Your Success & Bank Roll 0 comments
    Jul 16, 2014 5:12 PM

    (click to enlarge)Getting started with option investing or trading is not easy…especially with so many "education" vendors out there-promising that their services are the only thing you'll need to be consistently profitable.

    The reality is-most of them are just plain awful…lacking the knowledge and experience needed to help investors strive in today's market.

    However, I'm thankful for them…because they get people engaged and involved in the market.

    Eventually, they stumble across OptionSIZZLE…which gives me an opportunity to show them the right way to approach the financial markets. Now, I was fortunate enough to see the power of unusual option activity (and following smart money trades) very early in my career.

    In fact, I saw it work with my own eyes when I was a runner on the floor of the Chicago Mercantile Exchange (NASDAQ:CME).

    To do this day, I believe it's the best indicator for finding potentially profitable trades-my number one method for generating ideas.

    Does this mean that it's the only way to make money from the markets?

    Absolutely not.

    But I know it works…and have seen it work…more times that I can remember. But trading ideas can come from so many different places. For example, some traders like to focus on the technical landscape, looking for patterns in charts that may provide information on where a particular stock may be headed next.

    Others, might ignore price charts and focus solely on the fundamentals of the company.

    Furthermore, there are traders who focus on news, earnings and economic releases. Their skill lies in their ability to digest the information and make an opinion on whether or not the market participants are gauging the new information correctly.

    I could keep going, but I think you get the picture. The bottom line, there are many ways to skin a cat.

    Which method is the best?

    Well, it really depends on what you're comfortable with. It's going to take some trial error to piece it all together. In the beginning of your investing or trading career, it makes sense to explore several different methods to see which you feel works and what you're comfortable with.

    I myself, am very active in selling option premium and creating structured trades, which I believe creates a higher probability of success than buying option premium. In fact, statistics and research backs my belief. However, I still have people that tell me that they only buy options.

    In any event, learning how to make money from the market is not a skill we're born with…it's something we all have to learn.

    Heck, I passed several security exams to get in the industry as a professional…but still managed to lose over $2k on my first ever options trade.

    Once you've identified the "style" of trading that works…you try to improving your method…refining and tweaking your techniques as the market evolves.

    One major issue new and sometimes experienced traders make is "style drifting." It's when you put on trades that are out of your wheelhouse or take someone else's trade idea without fully understanding the merits behind it.

    For example, let's say you generate ideas from researching stock charts and thought a particular stock looked bearish…however, there is breaking news-a rumor that the company is going to be acquired. With that said, you jump in and buy calls in the stock.

    An hour later, it turns out the rumor is unwarranted and the stock price starts dropping hard…the volatility in the calls get sucked out and lose half their value.

    In the example, the trader's strength lies in reading price charts-not dissecting news. They didn't know how reliable the source was or whether or not the story had merits. They simply hoped that it was true and they would catch a quick pop in the stock price.

    Not only did the trader lose money…but they probably cursed themselves out a little bit for not sticking to their trading plan and staying disciplined.

    Here's another one…a trader focuses on longer term option strategies, mainly trend trades that last a month or two. They don't like weekly options because they feel they move to fast for them…the rapid fluctuations often cause them to exit at the worst times.

    However, longer term option trades give them time to see their idea evolve without panicking if it doesn't work right away.

    For some reason, they feel compelled to buy some weekly options in a stock mentioned by a guy with ponytail on TV …hoping that this time would be different and they'd have success with weekly options.

    It turned out that the stock options did pop on the mention….however, not enough to get out (when you factor in commissions)…a day later the stock didn't move and the time decay crushed the value of the options.

    Again, a situation of taking someone else's trade idea…and putting something on in which the trader has struggled with in the past and doesn't feel comfortable.

    Style drifting can happen out of boredom…excitement…the desire to make money even when opportunities are limited.

    In order to fight the urges, you've got to focus on your process…treat investing or trading like a business…your job is not take make trades everyday…it's to find opportunities that give you a chance to make money….and if there are no opportunities that day-it's OK.

    It's a terrible feeling when you make money from your A Trade…but instead of adding gains to your portfolio…it's making up for losses you made from style drifting. Without a doubt, this requires patience and discipline…but it's well worth it. It pays to stick to your bread and butter trades when building your trading account…you'll thank yourself in the long run.

    How Can You Figure Out What Your A Trades Are?

    Keep a journal and record your ideas, trades and overall feelings on a daily, weekly or monthly basis (depending on how active you are).

    You see, by keeping notes on why you got into a trade, the risk you took, trade specifics (option strike, expiration, option premium spent or received, # of contracts bought or sold, implied volatility, historical volatility, option greeks, the bid/ask spread, date position optioned, adjusted and closed etc.).

    In addition I rate my mood and energy level.

    For example, I rate my overall emotions from 1-5 scale…a 1 being: Feel Great…and 5 being: Feel Rubbish.

    Eventually you'll have enough stats on your performance to identify what you do well…and what you struggle with.

    For example, let's assume you think you trade earnings well…however, looking back at your journal, you find out that you actually stink at trading earnings.

    Instead of relying on your feelings or memory…you can go back and look at the numbers for some hard evidence.

    It's very similar to a sports team watching game film after each competition. They study what they did right…what did they did wrong…and what they have to do to improve for their next game.

    You might see it at the health club, individuals writing down the exercises they're doing, the amount of time spent…if they're lifting weights, the number of sets and weight being used. They do it to track progress, improvement and make adjustments.

    And believe me…keeping a journal is extremely important when you're just starting out as an options investor or trader. I recently read that Lebron James gets a four-page scouting report before every game…while his teammates get a two-page report.

    Talk about studying and preparation!

    By the way, two great places to journal are EVERNOTE and Google Docs. And yes…they are both free.

    Now, if you're still in that trial and error stage…trying to figure out what you're A Trade will be… check out my free report on how I use unusual options activity to find tomorrow's big stock movers.

    Have you ever caught yourself style drifting?

    If so, I'd love to hear your story…it happens to the best of us.

    I'll be hanging out in the comments section below.


    Join For Free To Receive My Ideas & Market Commentary I Only Share In Email

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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