My Blog was featured on last Friday's Community shout-out! Thank you for the 'œTop Ten Mistakes New Options Traders Make' link. Ineed, I have made some of these painful mistakes. I think many of the TradeKing blogs here are very educational.. that piece on being right most of hte time Vs. actually making money, sticking to one's own rules, etc.. all wonderful pieces!

I have concluded my first month with a big loss while everybody else celebrated the rally. Being a contrarian did not pay off last month. The trades I touted in my previous blog: NYX and QQQQ went against me. Besides, I should have cut my losses sooner. From now on I vow to selloff any spreads, or short options before they get ITM. I waited too long on QQQQ 'hoping' that it would retreat back to a 'reasonable' level.

Now comes the question, aside from cutting losses and minimizing losses, have I made any fundamental mistakes in my trade picks? I  still think I picked the right side of the trade on both based on my research at the time: bearish on QQQQ and Bulllish on NYX, but my spreads were too tight for my financial (and more importantly, emotional) risk tolerance. I think I will only go for trades that are less than 10% ROI from now on, it may turn out to be better on the long term; who knows, maybe even 10% is still too ambitious, I guess I'll find out (the hard way).

It is unfortunate that it will take me months to recover the losses I incurred in weeks, even if I started to perform. However, that's OK. I'll justify it as a high price paid for education. I'm in it for the long term. Heck, if the options thing continues to go against me then I'll go back to regular stock trading based on fundamentals, which worked for me.

So what's next?
Try Iron Condors. I'm already a Short Spread fan (despite losses), and Iron Condors are basically a double-spread strategy. I'll have to see how adjustable they are to market moves. They are bad if things moved too quickly in the first two weeks in one direction, but so is a one-directional spread, so I'm thinking I'll be able to cut one side and keep the other if it reaches one of the edges..
Continue to focus on indexes and ETFs (although I'm tempted to through money at AAPL)
Diversify my trades a bit more. Having 70% of my $ in QQQQ did not serve me well last month. I don't know what I was thinking. I always knew that diversification is the most important rule in regular stock investing, but somehow it slipped through the cracks when I started doing spreads.
I have limit trades placed to open the following Iron Condors:
SPY 78% probability 144-152
IWM 75% probability 77-87
EEM 76% probability 110 - 130
and I still own a 46 QQQ bear spread, which is nearing the red line too. I may need to pull the plug on this one with a break-even or a small loss.

My rationale:
Speculating on lesser volatility. China market growth should be restrained by possibility in interest rate hikes by Chinese government, while at the same time US market does not seem to care about a sharp Chinese market fall as it did end of Feb. (we saw that last week when markets shrugged it and continued the rally because of solid domestic earnings)Part of Q1 earning season is behind us, so hopefully that should tone the market volatility down a bit.

Well intended suggestions, hope that you find something useful in them, even if you don't agree with all of them (yet :-) ):
1. Why limit ROI? Don't limit the stuff that will save you, limit the stuff that will hurt you. It seems that it would make more sense to try to maximize ROI, while constraining other things like risk, potential loss, etc. When you identify risks, try to prioritize them and set up AND IMPLEMENT a risk mitigation strategy for each. For example, if event X happens, it means this risk is more likely, so I will do Y.
2. In asking the question whether you chose to exploit the right opportunities-- it's not that important until you prove it is that important by analyzing your overall process. You have to start somewhere... Analyze the whole process and find out what key steps caused the trade to be unsuccessful. If it WAS the opportunity you selected, then do root cause analysis on that to find out why. Never think in terms of right or wrong, that signifies you are emotionally attached to the trade. Set tracking events (specific, quantifiable events that confirm/reject your hypothesis-- e.g. if Brent LC futures do not close above 36.00 in five days, my hypothesis is wrong; Action-- sell all contracts at best possible price within next three days) and decision points, that way you will follow your rules for that trade. Don't generalize your rules, create them for each trade.
3. Don't fear volatility. Be neutral and open to what the market is doing. FOLLOW THE TRENDS. If volatility is increasing, it makes more sense to buy options than sell them. Likewise is volatility has been very high and is stabilizing, it makes more sense to sell them. Contrarian is good, but set clear confirmation signals that must be fulfilled for your hypothesis.
4. Ben Graham once made a great comment about diversification that I'll paraphrase-- if you want to diversify, then you should just buy total index ETFs and save yourself a lot of stress. The reason you choose to be an aggressive investor is because you have confidence that you can be extremely successful; if you don't believe in yourself then why not just settle for the market's rate of return? 95% of this game is PSYCHOLOGICAL, not mathematical. DON'T put more than 10-20% of your speculative capital on any one trade, but not because of diversification, because of sound capital managment.
5. Cutting losses. Yeah, setting stop limits is important, but you can lose a lot of money setting them too tight. Don't think that there is some perfect percentage to set them; all this should be calculated when you are doing your Reward/Risk analysis going into the trade. You should know where your decsion points are, why they are there, and what you are to do when they are hit. If you are not calculating the entire trade to maximize ROI, and comparing it to other potential trades and only trading the very best, you are not putting the odds into your favor.
6. Trading. Being a good trader is as important as picking good opportunities. I can go into just about any stock with a healthy trading range on a given day, glance over the charts for the last few months, calculate the daily expected trading range, and pick a nice point to buy in at, and sell that day and make a profit, like clockwork. If there is a rise early in the day, I can sell calls, then buy them back as it drops, then buy calls to open at the bottom (already paid for), then sell them at the top. It takes a lot of experience and a particular kind of psyche to do this. Knowing how to read charts in real time and see what lies behind the candlesticks is not covered in options trading books much, but if you really want to bring the odds in your favor, it matters.
7. Indexes versus individual equities. It is hard enough to figure out the issues that affect one company; wouldn't this be easier than trying to predict the whole market? Example of a recent trade I made: PCU and the miner's strike. Long story short: I know that miner's strikes are usually short... gov't threatened right off to use force if it lasted, and it was very clear the first day strike had no popular support, even among the miner's and their union reps. I bought up call options on PCU as it reached it's low, with 12 day trade duration, ROI predicted between 50 - 250%. Trade exceeded expectations. Point. Metals were on fire, with ever increasing demand. PCU had very few workers involved in the strike. Strike itself was actually increasing global demand for copper. Governement, industry, and workers union ALL wanted strike to end quickly. All risks and confirming signals easily verified, my confirmation signals focused on public announcements of union willingness to end strike, governemnt willingness, effect on production, increased price of copper, etc. ... all satisfied very quickly, confirming trade as go. The perfect storm, in fact. With a single company, with clearly defined issues, you can find sure things like this-- and this was an EXTREMELY high probability of success once the confirmation signals panned out. (note: The trade is made first, confirming signals and decision points determine whether to continue holding the position) The trick is developing the patience to never settle for anything less than this kind of trade. I need to work on this one myself; the ones that just drop in your lap are the only ones you should trade (I need to put this in my process list soon, because when I don't see anything for a week or two I accept a trade that may be profitable, but there is also risk with less reward.) It is better to cherry pick situations with vey high profit potential and little risk. Even if you don't trade more than twice a month, you could end farther ahead because you are maximizing profit with very high success rate. I don't put much money on the sub-optimals, so they don't hurt me much, and my batting average is still pretty good with them, so I tolerate them for now.

Happy Trades!!