Financial Wisdom
Aug 13, 2010
A Bit of Trading Wisdom

I found this quote while reading financial blogs, and thought it worth sharing:

"Good traders know that opportunistic speculation is a process. Ignore any one single outcome, focus on the methodology that can consistently avoid catastrophic losses, manage risk, preserve capital. A good process can be replicated, a random spin of the wheel cannot."  Barry Ritholtz

When choosing an investment strategy - or an option strategy - for your investment club, it's important to not make long-term decisions based on the results of a single trade.  It takes multiple data points before meaningful decisions can be made.

Many times we cannot trade without our emotions getting in the way, despite the fact that we know it's better to reach decisions based on the merits of the decision, and not on fear of imminent loss or greed for gigantic profits.. 

If your club decides to write a covered call for the first time, and the stock rallies 20% in one week, think about the profit you earned, and not about what might have been.  Don't abandon the strategy - especially when it has been a success.  Most option rookies think of a stock surge as a 'bad' result because they earned less than the maximum possible profit. 

When the decision is made to write a call, you agree to limit profits in return for receiving a cash payment.  The risk for this trade is a stock price decline.  A rally is a good result and covered call writers should be pleased.


Any trade that your club makes to reduce risk - even when it's minor - is a good thing.  Preservation of capital should be a top goal for any investment club.  I understand that 'growth' has been the historical driving force for clubs.  If that's how you wish to run your club, then do so.  I'm merely suggesting that you consider using options to hedge risk, and when doing so, give yourselves an opportunity to learn more about the preservation of capital. 

Perhaps you an assign someone to make trades in a paper trading account and report back to the club members.  Everyone should take a turn in managing the paper portfolio because it's an excellent learning opportunity.   My warning is to take some time to learn and don't allow your first result to lead you to a final decision on how to manage the portfolio.

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