Thread by @VohiCapital

Sharing some thoughts on beginners who start trading short options.

Previously shared this on a closed WhatsApp group of friends.

#optionstrading

(1/n)

Short option structures like Straddles and strangles have a high win rate.

A 15 delta Short strangle will end up with typically higher than 85% of trader's as winners.

This is the biggest attraction for traders new to #optionstrading

(2/n)

This is also how a lot of options trading trainers sell to their prospective clients on the effectiveness of their #optionstrading systems.

But this high win rate comes at a cost.

(3/n)

New options traders typically start off with small capital, as they should.

He typically has come from trading directional stock/Futures and low win rates has him frustrated.

His system hopping leads him to selling options.

(4/n)

If he is "unlucky", he lands up selling his first few strangles and they either all expire worthless or he covers them for almost worthless.

#optionstrading

(5/n)

Suddenly from running a Directional systems where there is the pain of seeing drawdowns and losing trades, he now has hit upon a strategy that has turned out X winners in a row.

If he is "unlucky" AND "foolish" he lands up adding capital to his new found wonder strategy.

(6/n)

If he is "unlucky", "foolish" AND "insane", he borrows from friends/ family telling them he has cracked the markets.

(7/n)

This new trader who has not seen large moves that can wreak havoc on a short options position now has amounts of capital at play that he neither has the experience not skill to manage.

#OptionsTrading
(8/n)

This is exactly when that big move comes in and hits him hard. His account now sees a Drawdown far bigger than all the small drawdowns that he had seen with his previous methods.

#OptionsTrading
(9/n)

The key message here is that, yes high win rate of short volatility trading is a reality. It does come at a cost, that of facing large moves against the trade.

A few trades aren't enough for the probabilities to play out.

#OptionsTrading
(10/n)

New options traders are well advised to keep positions small until they've lived through some good volatile environments.

We are currently in one.

So trade small, trade often.

#OptionsTrading
(11/11)