In Options, It's Okay to Be Wrong

07/16/2014 8:00 am EST

Focus: OPTIONS

Bob Lang

Founder and Chief Analyst, Explosive Options

Bob Lang of ExplosiveOptions.net explains that, when it comes to options trading, sometimes it’s okay to be wrong.

Admitting you are wrong is really, really hard—no matter what the situation. When it comes to options trading though, you have to be careful. Many traders and investors let their ego get in the way rather than admit they made a mistake—and that leads them down a very calamitous road.

I have seen countless options and stock traders crash and burn due to a lack of focus and humility and a need to be right at all times. Traders who hold on too long are often left holding a position that has turned into a disaster, or they do something even worse, like buying more. Time, of course, is the great equalizer. The idea that we can wait out a mistake until the situation improves—and we are proven correct—is not a smart strategy simply because the future is always uncertain.

If you are stuck with a bad trade, it always helps to remember that trading is not a game of perfect. When you are trading options, you not only must we get it right with direction but also with timing. It’s super tricky, sure, but it’s also okay to be wrong! Did you know that an options trader can make a great living being wrong half the time? Yes really!

So the question isn’t about how to get it right all the time, is it? The question is really this: What can we do to avoid falling into a narcissistic frame of mind? The answer couldn’t be simpler. Do something most people cannot do— admit you are wrong, and move on.

I do it all the time—and it feels great. Last week, we booked a lot of trades and some were very nice gains. It felt so great to see trades comes together and our accounts grow. However, we also lost on some trades too, and those brought us down to earth. Instead of hiding them, I chose to let everyone see the losses. While it is certainly nothing to be proud of, losses clearly show the reality of options trading.

My transparency had a surprising result. I received some really nice comments via Twitter praising me for mentioning the losing trades. A few people even noted how rare it is to hear a trader admit to losses—and this is true. Emotions run high during the trading day, and losses can really set us back emotionally. For me, it’s cathartic to think about the loss once. I don’t dwell on it. I make a note of what I learned, and then I move forward with a clear and focused mind.

This is not easy to do, of course—it takes practice to remain clear-headed and not let the ego get in the way. If you are struggling, remember that we are talking about trading here. This is not a life-or-death situation. Nobody will get hurt if you are wrong on a trade.  And, you never know if your next trade will be a winner.

By Bob Lang of ExplosiveOptions.net

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