I used to have a list of trading
rules guidelines taped to my monitor. The list went through several iterations, but near the top were always reminders that a good trader needs “patience and discipline” to be successful. The list is no longer there, but by now the important ideas have been branded into my psyche.
On a related note, over the course of the past few years I have increasingly gravitated toward trading options. More often than not I find myself selling options, either with or without a directional bias, and enjoying time decay (theta) work in my favor to increase my portfolio value. Recently, it occurred to me that selling options has made me a better trader because it has cut down on the number of trades I make and enhanced my patience and discipline. How does this happen? Each morning I look at my portfolio and see what my portfolio’s aggregate theta is. This tells me how much money I will make from time decay alone if the market does nothing and I do not make any trades. As a rule, I try to structure my portfolio so that the aggregate theta is at least as large as my daily profit target. For this reason, I
never rarely feel obligated to “make something happen” and force trades that should not be taken.
While there are many approaches to trading, I believe that every trader should be comfortable trading long positions and short positions, buying options and selling options. Better yet, traders should not have a built in bias toward long-only trading or only buying calls. Ideally, a trader should be directionally agnostic and equally comfortable with the full menu of possible trades.
Ultimately, a considerable amount of trading success comes down to the “know thyself” dictum. A trader that understands his or her personality type, comfort zones and preferences can do a better job of applying the appropriate psychological approach to trading. These skills are some of the most difficult for many traders to master. It is quite possible that selling options may provide a shortcut to developing some of those skills.
For more on applying psychology to improve your trading, the best resource on the web is undoubtedly Brett Steenbarger’s TraderFeed.