30 lines
1.9 KiB
Plaintext
30 lines
1.9 KiB
Plaintext
The HAPI: The Hope and Pray
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Index
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So you bought a call spread. At the opening bell the next morning, you find
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that the market for the underlying has moved lower—a lot lower. You have
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a loss on your hands. What do you do? Keep a positive attitude? Wear your
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lucky shirt? Pray to the options gods? When traders finds themselves
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hoping and praying—I swear I’ll never do that again if I can just get out of
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this position!—it is probably time for them to take their losses and move on
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to the next trade. The Hope and Pray Index is a contraindicator. Typically,
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the higher it is, the worse the trade.
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There are two numbers a trader can control: the entry price and the exit
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price. All of the other flashing green and red numbers on the screen are out
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of the trader’s control. Savvy traders observe what the market does and
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make decisions on whether and when to enter a position and when to exit.
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Traders who think about their positions in terms of probability make better
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decisions at both of these critical moments.
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In entering a trade, traders must consider their forecast, their assessment
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of the statistical likelihood of success, the potential payout and loss, and
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their own tolerance for risk. Having considered these criteria helps the
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traders stay the course and avoid knee-jerk reactions when the market
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moves in the wrong direction. Trading is easy when positions make money.
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It is how traders deal with adverse positions that separates good traders
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from bad.
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Good traders are good at losing money. They take losses quickly and let
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profits run. Accepting, before entering the trade, the statistical nature of
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trading can help traders trade their positions with less emotion. It then
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becomes a matter of competent management of those positions based on
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their knowledge of the factors affecting option values: the greeks. Learning
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to think in terms of probability is among the most difficult challenges for a
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new options trader. |