Stutland Volatility Group's Brian Stutland shares his insights on how he manages risk intra-day and what common pitfalls traders should avoid.

My guest today is Brian Stutland.  He's a contributor to Options Action on CNBC.  We're talking about his evolution as an option trader.  So, Brian, you've probably had a lot of hits and misses as an option trader.  Any lessons learned that you can share with the audience about your evolution as a trader. 

Yeah, absolutely.  Well, I started trading basically in 1998.  I saw the boom of the internet bubble from there and then we saw 9/11 and the market going down and then coming back out of that recession into 2008, so I have seen lots of volatility up and down in the marketplace and one thing I have sort of taken away from the market is to always have a thesis when you're trading to have an idea of the position you want to have on and not have on and when your thesis goes wrong it's to get out of that position that you have. 

You know, not to sort of sit around and wait for something to happen for yourself.  I think it's very important to just recognize when something is not going right for you to end that, analyze your risk on that position and to, so to speak, get out of that trade when you need to in order to stay in the game and play again the next day.  You know, you can't hit everything exactly right, a homerun every single trade.  You're going to have winners.  You're going to have losers.  It's sort of like you want to be the casino though right?  You want to be the house.  You want to have more winners and losers and you want to have things work in your favor and so changing your thesis and changing your positions is a key thing in this market place.  We've seen so much volatility over the last ten years that being able to adjust to the times is so important.

And I know a lot of traders will come in the morning and have either a long or short bias and they will trades in that direction regardless of what the market.  If they're not right they will just stop trading.  Will you flip flop and say, "Okay, my initial direction was long but I need to be sure today."

Yeah.  I mean typically like in our advisory situation we're typically long all the time, but what we do is we take a look and we say how much risk do I have on the table today?  How much of my portfolio is moving relative to the S&P 500 and how can I hedge that out.  Right, so if we do want to be short or we're worried about an event in the market place it's so important to analyze how fast your portfolio is moving relative, let's say, the S&P 500.

Here at the Expo you talked about in one of your segments about performance as it relates to how much risk you took to get that performance and I think most people look at performance and they think I want to make 20%, but they're missing that piece of it, right?


That you need to consider.

Yeah, yeah.  I think people are always just looking at did I beat the S&P or did I not when you should really be looking at is could you sleep at night if you had a $10,000 investment and it's down $2000 over a couple weeks?  Can you sleep at night or are you sleeping in the fetal position and worried and nervous about yourself, so it's all about understanding your own risk tolerance, where you're willing to take that risk and not let greed get ahead of yourself to over invest and then you end up selling at the wrong time, right, because there's always washouts in the marketplace and the key thing that I have learned as a market maker where you're trying to take a little bit of edge out of every spread everyday and trying to make a little edge is you have to stay in the game.  Right, and so understanding that risk tolerance is so important.

So, how do you judge success for yourself, then, as a trader?  If it's not pure performance, it's also how much volatility can I stomach? How did you as an individual trader judge I'm doing well or I'm meeting my goals?  How did you do that?

Well, yeah.  I mean, I think setting goals for yourself on a month by month basis is important or a yearly basis.  Where you want to be as an investor at the end of the year and then devising an investment strategy around that. 

For example, you know, if you're someone that's near retirement age right now interest rates are low for Treasuries or fixed income.  It's difficult to get any kind of yield but maybe you say to yourself, I don't want 2%, but I need 5%, right?  That doesn't mean you have to go out and buy these small-cap high flying names, right?  You want to analyze your investment strategy, make those goals set for yourself and be happy with that.  Don't look back and say aww, I missed the market.  It's up 10%.  I should have been in stocks.  You can't look back.  You have to set those goals for yourself and stick to that investment strategy. 

Alright and then finally, as a trader yourself what do you feel like you could still improve on as a trader?  What are you still working toward in terms of achieving and having success there?

Yeah.  I mean, it's an ever-evolving game of learning and understanding where the market is moving.  I am always looking at new strategies to devise to get into the marketplace, whether it's looking at alternative strategies.  There's nothing wrong with not only just being a long buy and hold type person.  Those days could be gone with all the algorithm model and the high frequency trading.  Those sort of days could be gone, so looking at different ways to be in the market whether you have to improve how often you're getting in and out of trades or where you want to be at is critical in this day and age, so we're always looking to improve that whether we should be initiating into trades more often, less often, finding certain levels in the marketplace is a continual analysis that.

Just always adapting.

Yeah, absolutely.