Seven Essential Credentials of Successful Optionetics Students, Part V
May 5, 2008
It’s now May, the fifth month of 2008. Incidentally, here comes to Part V of our 7-part series – Winning Strategies. A lot of my students asked me why this is important. I wish to relay this question to the Champion Leagues’ semi-final match last week at Stamford Bridge between Chelsea and Liverpool. Why do you think Chelsea was able to beat the team I have been supporting for more than three decades? To me, yes, it was partly because of the referee’s error in denying a potential penalty on Didier Drogba’s tackle against Sami Hyypiä inside the penalty box during the first half of the extra time. However, I believe that Chelsea’s success in making to the Moscow’s final is largely due to the successful implementation of its game plan. Liverpool controlled the entire game but due to one mistake made by Rafa Benitez (he took off Liverpool’s star striker Fernando Torres, believing that defending was more important during the extra time), Chelsea seized the opportunity to attack, and eventually they scored 2 goals during the first half of the extra time. Sigh! I was quite sad after the match. But life continues…
Now, in our trading business, having a winning strategy is not good enough. You may be in a series of winning mode, just like Liverpool who have beaten a series of stronger European teams until they met Chelsea in the semi-final. As each opponent is different, Liverpool has to change its game plan each time while trying to avoid making any fatal mistakes. So, I respectfully submit to you that you need to have winning strategies, and not just one.
If you have attended the advanced seminar before, you may recall what George told you. He emphasized to his students that they need to develop a winning strategy. It does not matter whether one turns into an iron condor specialist or a “fly” man. The key thing is to master a strategy and become an expert in that strategy. I think some of our students have taken George’s saying out of context. Again, you may disagree with me. Don’t get me wrong. I am not suggesting that George has given you false information. However, are you flexible enough? Think about what the market did over the last 4 years. Does it make sense to adopt only one winning strategy? Will that give you consistent profits?
I am using the weekly charts of (SPX) in 2004 (Chart 1), 2005 (Chart 2), and 2006 (Chart 3) as a proxy to show how the broad market generally behaved. Did you notice that SPX behaved differently in each of these years?
Chart 1: Weekly Chart of SPX in 2004
(Source: Profitsource)
Chart 2: Weekly Chart of SPX in 2005
(Source: Profitsource)
Chart 3: Weekly Chart of SPX in 2006
(Source: Profitsource)
In Chart 1, SPX had been gyrating in a tight range until November and then it made a 120-point move in merely 2 months. In 2005, SPX had been literally gyrating within an approximately 140-point range for the entire year. In 2006, it did the same thing for the first half but since then it was powered up by the bulls and moved only to a direction (i.e. go north).
So, if you are a master of a sideway strategy such as time spread, you would find it tough to trade in the last two months of 2004 and the second half of 2006. However, you should have made very good money in 2005 where the market was in a sideways mode. On the other hand, if you are a directional trade master, your performance in 2005 could be lousy but you should have been able to make a killing in the second half of 2006.
What I am trying to illustrate is something which quite often newbies have difficulties. In our 2-day class, we covered a few options strategies such as long call and put, vertical spreads, time spreads and straddles/ strangles. The problem for newbies is that they tend to adopt a very simple mindset and believe that maybe they should master only 1 strategy. So, they are constantly looking for the best long call spread out there. Do you see such questions being asked in the discussion board very often? I do. The problem with this approach is that you let the option strategies dictate what you should do. It’s like the tail whacking the dog. I respectfully submit to you that you should let the market tell you what you should do and pick an appropriate option strategy that fits to the opportunity (i.e the dog should whack the tail and not the other way). So, you need to master not only 1 but at least a handful of options strategies because as and when the market is evolving, so is your choice of options strategies.
Put what I have said in an easily understood context. I did tons of at-the-money [ATM] time spread in 2005 and early part of 2006 and at one time, I had consecutively 10 wins on this strategy. I felt like the king because all 10 ATM time spreads were winning trades. However, when the market decided to be in a volatile mode, do you think that I continued with my ATM time spread strategy? Of course not. I switched from non-directional trading mode to directional trading mode in the second half of 2006. This is because the market was telling me that it was heading to the north. So, I picked the strongest sector at that time – the oil service sector and had been constantly trading options on stocks such as Schlumberger Limited (SLB) and Transocean Inc (RIG). I also traded extensively Tom’s calendar trading system and the 1010 system during that period. Now that the market has been in an extreme volatile mode, I am concentrating on my BMIC system, as I believe that with such volatility, I should put my money in a better use and this is the forex market. With this kind of mindset, I said to myself I remain flexible and keep an open mind.
Now that you have read what I said above, I hope you won’t be asking me where to look for the best long call spread, as it does not exist. Let the market tell you what to do, and make sure you have sufficient tools to deal with a particular opportunity.
To access previous articles written by Jack Wong, please click here.
Jack Wong
Staff Writer
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