“One of the least recognized trading strengths is mental flexibility: the ability to keep an open mind to the evidence of the evolving marketplace and revise views and strategies accordingly.”
The quote above is by Dr. Brett from his excellent TraderFeed blog.
We all have our favorite methods for using options.If you have been earning good profits year after year, it’s difficult to accept the fact that times may have changed.For example, most individual investors only understand bullish strategies, such as owning stocks and mutual funds, or writing covered calls (or writing naked puts, an equivalent strategy).
When neutral to bullish markets are absent – such as when the technology bubble burst early in this century, or during 2008 – those who insisted on continuing to trade using bullish strategies performed poorly.Those who adopted an investment strategy that provided a partial hedge, e.g., the slightly risk-reducing strategy of writing covered calls, fared better than those who owned a diversified stock portfolio (compare BXM and SPTR for 2008*).But those who recognized that times had changed soon enough to do something about it fared far better.
*The buy-write index (BXM) declined by almost 29% in 2008
SPTR (S & P total return index declined by >36%
During the market declines, the bears were successful.But even bullish traders who owned insurance (by adopting the collar strategy, for example) performed far better than their bullish peers.
The point is that it’s not so easy to abandon successful methods.But it’s also important not to fight the trend and to recognize that your favorite methods will not always be appropriate.
If you consider yourself to be a better than average market prognosticator, then there must be times when you don’t want to be either bullish or bearish.That’s the time to adopt amarket neutral strategy (iron condors, for example).Such flexibility allows you to survive in any market – but only when you are diligent in managing risk.
