Maybe I shouldn't have put this in the options category, as it applies to all types of trading, but a buddy of mine used to piss me off so badly with his "complex" options positions, I thought I would put it here. I remember walking over to his desk on a regular basis, and seeing half of a page of option positions on SPY. I don't consider myself an adept options trader, but I know my greeks very well, and I'm pretty good at identifying synthetics. But I would just tell him, "Dude, if you combine these 3 positions, you're long the SPY, and if you combine these 4, you're short SPY. If you combine those 7, you're short 1 Delta." And there would be many SPY positions in addition to those. He was a very smart guy, but he was addicted to the idea that complexity was the road to success, so he would put on leg after leg of certain strategies, trying to outsmart the other guy. And the result would be the above. The last I talked to him was over a year ago, and he was thinking of opening a pizza joint. I don't know why I'm so mad today, and why I feel like ranting, but I feel the need to share the idea that simplicity is completely acceptable. Maybe it's the "why isn't the obvious not so obvious" thread, and the fact that I just read The Alchemist. What a simple and amazing book. Bottom line is this: Research is a necessity. Backtesting is a necessity. Extremely hard work and tenacity are necessities in this business. And then it gets hard, when you need to get to know yourself. The need for complexity is a myth. You're not going to beat the rocket scientists (literally) at Goldfish or JPM. But you don't have to. That's the point. Done ranting.... for now.
No argument, as far as options, I only buy calls/puts, well defined risk and off I go. In the meantime, laugh at the others making a hard game, harder.
(a) Everything should be made as simple as possible, but not simpler." (c) not me. (b) Conceptual complexity is not the same thing as operational complexity. E.g. you could have a fairly complex enough idea about the dynamics of implied volatility or the shape of the terminal distribution, but expressing a view based on that idea might take at most a leg or two. (c) You could have a number of simple strategies that combine into a fairly complex book. Do not mistake this for a single "complex position". (d) Yes, you can outsmart the "rocket scientists" (I'd know, I am one of them), as they are acting on a totally different set of assumptions and risk management constraints. (e) Frequently, when you see somebody elses positions that do not make sense, first you should doubt your own perception before assuming that the other guy is an idiot. E.g. (a real position) if I had -10000 SPY Sep12 125 calls +1000 SPX Sep12 1260 calls (PM expiration) was I really flat?
B through D make me remember why I'm an equities trader, and why I don't want to compete against a guy like you. But E is actually pretty simplistic to me. This is the stuff I was able to recognize pretty easily.
It may seem like I just contradicted myself, but I didn't. When I do my thing in stocks, I don't feel like I'm competing. I'm just trading. I used to feel that way, but not anymore. It's just a game. But if you were to put a gun to my head, and throw me into the pits at the CBOE, I would be starting all over psychologically. I would feel the way I used to when I first started trading. Like I said, I know my greeks and synthetics fairly well, But you would take my money day after day.
I just buy calls and puts to. All the special trades that some options experts do also have a risk factor. I risk 3% of my account to possibly make much more. With a 50% win ratio and a higher reward then risk most of the time. I do fairly well just buying calls and puts. I think the smartest people are the people who keep things simple. They are the ones that realize the bottom line. They're trading to turn a profit. Obviously purposely complicating things because you can is not really a smart thing to do. If you listen to icons like Warren Buffet, George Soros. They always speak in lamens terms. They are easy to understand and make perfect sense most of the time. Neither one is a rocket scientist but they sure are wealthier then most rocket scientists. I keep things as simple as i can. I plan on trading for a long time the last thing i want to do is outsmart myself. The thing is once you find something that works for you there is no need to reinvent the wheel.
It's been a while, but let me give you an example. He'd be long 20 sep calls because of a calendar. 15 rows down his sheet, he'd be short 20 sep puts because of debit spread. Long 2000 SPY, right? Well I would go through his entire sheet and figure out he had on a lopsided double diagonal or something.
Ok, went for a walk with the dog in the deep Wisconsin snow, and all is a little better now. But one thing that goes through my mind day after day is RedInk's comment on some thread somewhere when he said "Trading isn't that hard, it just takes a little discipline". The only thing I would add is that you need to find your niche, whether it be in life or trading. When you find it, it won't take that much discipline, because it's all you'll want to do. (Thank you Brett Steenbarger).
I think it's the discipline that is hard. I have always thought about finding a trading partner. One who is highly disciplined in life. I give him the trade calls with entries and exits. He manages them based on your criteria. Ha Ha! I grade myself on discipline monthly. Iv'e never given myself an A. Even though i'm good at what i do unfortunately i'm not like a machine. Thats the battle. I will say though that i am the most disciplined i have ever been due to the passion i have trading. Thanks for the insight!