Uncertainty – What Else is New?

February 10, 2011, 11 a.m. EST:

Today’s market opened weak and is now trending lower. But what does that really mean?

Options traders don’t enjoy the luxury of certainty in the market every day. On those days when strong movements do take place, we can all feel safe following the trend. But when markets move downward weakly like they are doing at this moment, what strategies work best? Should we buy, sell, or stay on the sidelines?

The truth is that options trading, like trading in all other products, is an unsure environment. If you know what this afternoon’s market is going to do, you can probably get rich. But if you are like the rest of us, white knuckles and waiting to see are the order of the day. Trading wisdom is gained by knowing how to manage uncertainty. Those who claim to know what is going to happen next are rarely right, and make the most dangerous of advisers.

“The uncompromising attitude is more indicative of an inner uncertainty than of deep conviction.” – Eric Hoffer, “The Passionate State of Mind,” 1954

About this week’s Heavy Hitter
Michael C. Thomsett is a widely published options author, with six options books in print, published by John Wiley & Sons, FT Press, Amacom Books, and Traders Library. He blogs at FT Press and his website is www.MichaelThomsett.com.