Risk Management is Critical To Survival in Trading Options and Stocks

Got a ‘Chip and a Chair’?  Then You’re Still in the Game!

There is a great story of luck and persistence about  Jack ‘Treetop’ Strauss.   A towering figure, Strauss was an accomplished poker pro.  In 1982 he was playing in the World Series of Poker, having made his third final table of his career (he finished second to legend Johnny Moss in 1971).  So as legend has it, during the second day of the tournament he was heads up (one – one) in a huge pot and after the last card was dealt he pushed all of his chips into the pot on a bluff.  His opponent called and it appeared Strauss was finished, but as he stood up and put on his coat and readied to leave he noticed a chip underneath a napkin.  Since he did not declare ‘all in’ during the hand the officials allowed him to stay and play the ONE chip — Jack was back in the game!

He sat back down after removing his coat, moved all-in and won the next hand, and the next — about five in a row.  Two days later he had amassed a huge stack and ended up beating Dewey Tomko in a heads up battle to win the title.  His improbable victory gave rise to the phrase above about a chip and a chair.

I bring you this story as a way to understand you should never put yourself in a position to be out of the game.  Now, clearly Strauss had luck on his side as his result should have been terminal.  But his luck turned into amazing results, and he is forever enshrined on the wall of winners in Vegas – regardless of how he got there.

When we are trading options we often forget the rules we established before the game starts.  Risk management, control and position sizing is my number one rule in trading.  We CANNOT forget that putting our money at risk makes us vulnerable to market moves and emotional swings.  In order to combat we must establish rules of risk tolerance that allow us to stay in the game. NEVER do we ever go ‘all in’ on a play – options, futures, stock or whatever the instrument.

When the juices are flowing and we’re in the heat of the battle we often lose our memory of the established rules.  It happens, I totally get it – happens to even the professionals (unless you trade a black box method or algorithm).  But if you ALWAYS remember to have some dry powder (cash available) you will keep yourself out of assuming the precarious position of ‘hope and pray’.  In my explosiveoptions.net service we advocate no more than 2% per trade (that doesn’t seem like much, but we do many trades and the leverage gained from options is outstanding).  This allows us to participate and not put our entire sum at risk on any trade that can have an adverse affect.

All option and stock traders should establish rules to manage their accounts accordingly.  Discipline and control trump all else in this game of survival, and isn’t what investing/trading is all about?  No guarantees.  There is an element of chance in trading (because the future is unknown) and in poker – but unlike the table game we do NOT have to make extreme bets like ‘all in’ to be successful.   Strauss got lucky to find a chip, but that is highly unlikely to happen to you.  Be true to your rules and you’ll live to fight another day. Note:  I will have a very special webinar on September 25 covering risk in options trading – do not miss this important session.

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