Over the years, I have talked a lot about learning how to manage FOMO (the fear of missing out) and risk properly, states Bob Lang of ExplosiveOptions.net.
Both are key to options trading success: One gets you in the game, and the other keeps you in the game. If you’re able to avoid FOMO and manage wins and losses productively, you can flourish in good times and bad. Until today, I never tied together these two concepts in one article, so let’s look at how they support each other.
The Two Keys to Options Trading Success
The fear of missing out is one of the four fears of trading. Mark Douglas first discussed them in his book, Trading in the Zone, which I consider a must-read for understanding the psychology of trading. When the markets start to run higher, traders fear missing out on gains. You know you only have a short window to make it happen, which amps up the fear. You don’t want to be left behind, nor do you want others to make money while you sit and watch.
If you let your emotions take over the decision-making process, you will take unwanted risks with your capital. It doesn’t stop there of course. Next, you throw analysis to the wind and start feeling your way around the trades because you want to be in on the action. So how can you manage risk in a way that allows you to participate without blowing up your portfolio?
We’re going to use my good friend Josh as an example. Josh is an active options trader who has been a mainstay in our chat room for years. He is always looking for promising trades while managing risk at the same time. But he also knows that trades don’t always work out in our favor. When that happens, you need to cut the trade. That is how you manage risk and FOMO and still make money. Josh’s recent experience demonstrates this perfectly.
How FOMO and Risk Management Work Together IRL
Josh had long calls in Google (GOOGL) and Union Pacific (UNP). The markets were moving higher, but even then, stock picking requires precision. At the time, he believed the decay factor was going to play a big role in both names, so Josh sold them at a near breakeven. “Time to move onto the next trade,” he said. Sadly, UNP rose higher, and he missed out on gains, Meanwhile, Google fell hard and he was spared a loss. Neither trade was perfect, Josh told me, but in the end that did not matter. He preserved his capital instead of losing it.
So there you have it. Manage your risk and your emotions, and you’ll find yourself cutting losses early and taking nice profits when you have them.
Learn more about Bob Lang at ExplosiveOptions.net.