Apr

9

It's May 6th 2010. Its lunch time and you're ready take a lunch break at your house from your high school up the block. You turn on your TV and turn to channel 724, CNBC. On the TV is a massive mob outside the Greek Parliament Building, which is surrounded by police in riot gear. There is this one gutsy guy who walks up to a police officer's riot shield and starts shouting. You open up your laptop and see that the little money left over from a string of losses earlier that year could be put to work by going short for a quick profit. The Dow is already down by at least 200, and then all hell breaks loose. The protesters and the police clash. That man taunting the police officer earlier is hit with a baton on the back of his legs and is seemingly flipped by the impact, and is swiftly hand-cuffed. The Dow, S&P 500 and NASDAQ all drop in unison. The ticker tape on the screen keeps showing lower and lower prices. You get this crazy idea to buy a far-out and cheap $115 put option on Apple, which is trading at around $140. You buy two contracts for .40 each, confident that Apple will tumble, hard; and it does. In an instant, those two contracts are worth well over $900, which makes up for the year's loss. As quick as the stock drops it rises, and by the time you go to close your positions the contracts are worth next to nothing.

A trader learns from mistakes like the one above, which is day-trading an option contract based on very little to no information other than a hunch. A trader learns to go by a system of rules with some elasticity. He knows his time scale for trading and has a plan-B for when things do not play out as they were supposed to. He is aware of other factors, such as changes in commodity prices or changes in foreign exchange rates which might affect his position. And last but not least, a trader knows when to take a break from trading.


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