Option Trading is Like Baseball

Make less errors and you can trade options profitably.

Option trading in the stock market is a lot like baseball. You can either win or lose depending on how you play the game and how you control your errors.

Just like in baseball, the key to option trading is to make less errors so they won’t take you out of the game. Staying in the game is the most important part of option trading and playing baseball. If you drop too many balls, make too many errors or strike out too many times you will be taken right out of the game, just like in options trading.

Only a grand slam will do

Every time you start an option trade you get up to the plate and what is the biggest mistake a batter can make; trying to hit a home run or a grand slam every time. You will see a batter get up to the plate and swing like crazy trying to hit that grand slam or even a home run and ninety-nine percent of the time he will strike out. If you approach option trading like this you will lose most if not all of the time. Thinking that every trade needs to be a grand slam or a home run will cause you to lose. It would be interesting if in baseball every time a player struck out he would lose $10,000. I imagine you would then see a lot more singles and doubles. The player who is always trying to hit the ball out of the yard most often strikes out and pretty soon he is going to run out of money and then he can’t play anymore. So the real key is to stay in the game. And in the world of option trading if you run out of money you are out of the game.

Trying for singles and doubles is the way to go, sure you can think and even expect that every time at bat you will hit that grand slam, but don’t go up there swinging like a mad man or you will just keep missing. The more singles and doubles you hit the higher your chances are of connecting with that one perfect pitch and hitting it right out of the yard. There is nothing wrong with those singles and doubles since every hit is a profit in option trading.

The slump

No one likes being in a slump but we have all had them. In options trading like baseball you can get into a slump. In baseball you can consistently strike out, ground out or even fall down on the way to first base and be tagged out. In options you seem to pick the wrong option every time, lose money on every trade and nothing you do seems right anymore. What happens when you get in a slump, you go out there and once again try to rip the ball out of the ballpark and hit that grand slam. With option trading you do the same thing. You look at your account and see a string of losses and decide you need to make up that money and start thinking the only way to make this up is with one grand slam trade. Too many times the harder you try the worse it gets.

The real way to get out of a slump is to stand back a little and see what you are doing wrong. Are you getting too careless, are you looking at charts wrong or maybe you are reading the wrong stock market tips. Once you have caught your breath and gotten some self-confidence back the best way to get out of a hitting slump is get back to what you did best. Start hitting the ball and getting those singles and doubles again and before you know it your swing is back.

I am perfect and can do no wrong.

This is dangerous, that overconfident feeling. You have been hitting and catching the ball perfectly and you start to think you really are good and can never lose. Then in the big game, final out, you drop the easy pop-up fly and the other team wins. In options trading if you get too overconfident you will get careless. You might even get lazy in your work and just start picking any option that hits your fancy because you believe you can’t do any wrong and start trading options carelessly. Since you believe you will never drop the ball again, you will start risking more and more money. Up to now you might have been sticking to your 10% rule, then one day thinking you are that good, you risk 75% of your capital and then you lose it all. You drop the ball in the big game.

The stock market and especially options trading has a way of making us all very human and the minute you start to think that you are smarter than everyone else, the stock market will just drop you right back down.

Keep hitting the singles and doubles and getting on base and sooner or later you might hit that occasional grand slam. There is a great saying in the stock market and options trading that you should remember. No one ever went broke making a profit.

© 2009 Sam Montana

Basic option trading: buying calls and puts

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