Young Options Trader Shares Common Trading Mistakes

[Music] comes back my friend special guest Alex in the house what's about hello hello good to see you again sure Alex are here from geek week and get yourself fired up yeah okay know your people no negativity don't be negative like the bat okay positive man these are your people right I don't give you people this is you and look I'm going to show you something tomorrow you could come to the geeks thing sit there and you're going to look around okay and you're gonna say that's me in 20 30 40 years yeah I hope not okay that's what you're going to say are you gonna be like wow look at this so Alex the 16 year old trader is back you're not 17 you don't turn 17 - like when - suburban yeah so did you get your license yet no oh my god I don't have time for that I'm busy you're scaring the children you are teaching a class on options in your high school yeah that's pretty exciting but and you've been coming on this show since you were 11 or 12 12 this is your 12 that's great so got four years of Alex on the show look at him girl okay mmm pretty soon the bats gonna be taking it first scotch and okay hearing naveen that no maybe not taking the Europe first what taking the Europe them again your hostile nature clearly your man yeah and the house here we can't waste even waste Europe on a lipstick it's not he's not a sightseer this is jr. that's true in fact one of my friends I was talking to in chemistry class last year we agreed upon something seeing the Eiffel Tower for real and in a picture postcard exact same experiences openers and I've seen it so I know you can go to Vegas listen we know we know exactly where you are you go to Vegas one to the next ten years to Google look at the Eiffel Tower at the at Paris Hotel you're done do you saw it yeah that's about correct okay don't worry we know who you are all right let's talk but for today you're here for geek week yes and we are excited to have you and let's get it on mr. Alex okeydoke what do you got for us all right so on Wednesday and I mentioned this to you earlier but every few weeks or so during the summer I like to try to try to talk to the fellow tasty traders and I go to this investment group and I talk about some topic that I come up came up with but they specifically asked for this topic because they're having a hard time dealing with low volatility markets okay as we all are so that I think is like a slider I got a slide right here ready to go to it let's do it okey-dokey so so violet low volatility markets are very tough especially for us and it's not only tough to make money but it's tough to judge your risk properly okay so what I mean by that is we're gonna when the VIX is low you get lower credits on any trade you're going to make your probability of success is going to be slightly lower and it's just much harder to make money because you take more risks to make less many very simple correct and what that means for novices or when I was trading even now I make some of these mistakes but you tend to take a little bit too much risk sometimes in low-volatility environment one of the common mistakes that even I've made especially when I was new or to this like trading options in the first one or two years is you increase your size just so you can get a bigger credit but you're taking an outsized amount of risk and what happens is when volatility pops you've realized that you've allocated too much buying power in your account you can't take advantage of it as a serious Asian what else I think there's another piece or two I think that when you get really low volatility the mistake that 29 make more more so than like increasing size or whatever else is we've gotten over that hump the mistake we make is we get much more directional because we're seeking you know an alternative route to make money so it's in periods of really low volatility when there's not a lot of other opportunities that we get very directional and that's usually what costs us more than the additional size so I always thought of getting more directional as just a function of larger size so so what I mean by that is even if you're not trading a larger number of contracts if you have more Delta you're taking on more risk okay and that's how I always thought about it okay but what happens is when newer traders increase their trade size to make money there's essentially selling low volatility more than they're selling high volatility which as from the research you've shown is completely backwards and what that also causes is it causes buying power problems so when volatility does go if you can't allocate your buying power to other places it's a bad pot up as we say it's a horrible pot outs decision but it's again we do this because we're trying to stay engaged and it's hard sometimes you know right so what I've noticed especially with people I've talked to are trying to learn to trade and myself early on is when you're new to options you start with only a few single strategies right so let's say that you learn vertical spreads and you realize that you really like vertical spreads because you can make them wider they can be very similar to a naked option if you structure properly and you just decide you really like the trade but that's the only because you like that trade it's the only trade you employ so I made this mistake for about like three months I would I think in the summer of 2014 the markets fell a little bit and I lost a little bit of money because I was focusing on only one kind of trade which in that case was a short strangle I believe and what happened was is of course I lost money because I had made a couple mistakes I first of all I chose the wrong strategy I was selling low volatility and I even did it in the Russell because it was slightly higher volatility than the other indices and I got too big with the size and I was only using one strategy however in low-volatility environments what a lot of new traders and traders who are learning don't think about is that they should expand their base to other strategies like calendar spreads or debit spreads for example and when you focus on one trade you're not considering other options that sometimes are more profitable and give it correct environment I think that's their I mean listen anytime anytime you're in a sub optimal environment for trading you are going to do things that you that may have a little not I don't say desperation but they may be a little bit of a reach right and I think that that's again that's human nature and one of the things that we like to say is it's much easier to look at it in hindsight and say oh man we should have made this like we should have looked at this kind of what we call adaptive change but the reality is it's not that easy to do right and and so you end up with you end up with kind of making those mistakes and I don't care if you've been doing this for you know eight years or you've been doing this for thirty years you know we're going to make the same mistakes sure like for example we have over trading listed on this board and I want to be like specific about that it's not about your trading too often you have a too many number of occurrences that's not what it is at all the idea of it is that when I talked to this group in Indianapolis I always talked about every time you should do a trade you should consider whether you have positive expectancy and there's several ways to calculate that one of which is the Kelly criterion which we don't need to get into but it basically shows the portion of your portfolio at a maximum that you should put in your trade based off average win-loss and probability of success and I always say that if you don't have positive expectancy you shouldn't be doing the trade so um the most common mistake I made as a newer trader is that I would put on trades without directly considering did it have a positive expectancy and I don't mean I did them didn't do the math I just didn't think about it more generally so what that someone do that if it's a back of yourself for example yeah if VIX is high yeah it selling a straddle probably has a pretty good positive expectancy sure but if you're selling a low VIX you're collecting a smaller credit which also means not only do you have a smaller profit but you have a lower probability success because you have a lower probability success and lower profit you we don't have the same positive expectancy and if you're allocating the same amount to that trade as you do in a high-volatility environment you're going to probably reduce your profits overall in those trades let's assume that you don't have high implied volatility but you do have high implied volatility rank so we've done a lot of studies on this and we actually did one yesterday and as long as you have high implied volatility rank you can still make a strong case I mean obviously in a perfect world you want both you want high implied volatility and high implied volatility right because that's your biggest opportunity but if you only have high implied volatility rank it's still a better situation than then doing nothing or waiting you know or just right and usually actually I generally want to talk about volatility i generalized when I say high IV I mean IV compared to itself absolutely rested Riley rank that's what or IV percentile whichever way you want to do it and what I say is I talked to people about this a lot even in my investment club at school or class is that do you think if a stock trades between an IV of 100 and 200 percent lights let's say in biotech or takeover company or whatever would you rather sell the one hundred percent volatility or the two hundred percent volatility which which makes more sense and of course the answer is two hundred percent so it's the same thing you can just apply that concept to any market yeah so I love this Alex stays seated for SEC hey John yes sir let's go to Scott really fast Scott's not ready cuz we go to a break and then we can grab Scott well just go grab them we'll keep Alex on we're not going to go to break we're just going to grab them okay hold on just go grab them and then we'll I want to see what the most active stocks are today well tell them it's only going to be like a 90 seconds all right okay all right good so what we'll say on so making up to adjustments today because we have we have so many people and we have so much stuff we want to do but I like when Scott comes on and tells the stuff that's trading most actively because I think that's kind of cool I think people like to hear that so you know what I find fascinating getting ready okay here's what I find destiny I love that I just turned 60 you're about to turn 17 we can have a conversation on trading and it makes and this is why I try to explain everybody most people in the world of finance have completely effed up the entire like the notion that you know you you know more than most 50 40 and 60 year old hedge fund managers well I just I love the idea that you can sit here and have this conversations these incredibly high-level conversations about I don't care if it's Kelly Khatri into to any kind of you know black Scholes model to a discussion of implied volatility to putting you know to implied volatility rank or whatever else it's fascinating to me you

Channel: tastytrade

Views: 10,739

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Keywords: trader, stock, market, finance, learn to trade, beginner trader, tastytrade, profit, trading tutorial, investing, how to trade, interview, high school trader

Id: n0nLAGDqGbA

Length: 11min 58sec (718 seconds)

Published: Fri Jul 21 2017