Christopher Smith, B.B.A., J.D.

I spent this weekend in Burbank, CA, with John Summa, Ph.D., learning and teaching about options.  The center piece of the weekend was a set of adjustments that Dr. Summa had worked out for the purpose of adjusting an iron condor spread.  A lot of people, myself included, have learned to adjust iron condor spreads using various techniques and I have found that those techniques have a great deal of similarity from one iron condor trader to the next…

What I found interesting about Dr. Summa’s adjustments presentation were the case studies that followed…

From the first case study on we saw actual adjustments made by Dr. Summa to iron condor positions that were actually traded by him, last year.  Last year was not an easy year for iron condor traders, so there were quite a few examples of adjustments actually being applied.

The interesting thing was that the adjustments actually used were often modifications of the techniques that were taught.  Dr. Summa explained that income trading is not a mechanical process and that there is an art to this craft.  What that means is that while we do have rules and we do need to follow them, we also need to think critically and exercise our skills as traders.

If we could boil income trading down to a static rule set we could then program that into a computer system and turn that computer system loose on the market.  Our job would be done as the computer would dutifully apply the rules mechanically, without fail.  This system does not exist, however.  Why not?

The reason our automated income trading system does not exist is for the same reason we have not yet heard of an electronic system producing great art.  Something organic is required.

We do need to build the box with its right angles and straight lines because that is what provides us with structure.  Those straight lines and right angles are the rules by which we are guided in each and every trade we execute.  We then need to learn how to think outside of that box.  Not to violate our own rules, but to adapt them to the situation before us.

The guiding principle is that which was laid down by Warren Buffet for his own application.  “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.“  All of the various option strategies you hear about, the adjustment techniques, all those fancy and often confusing names will do you absolutely no good as an options trader unless you absorb this commandment.

John Summa understands this rule of rules and has learned to bend those other rules that follow to serve the first.  Do not lose money on your trades.  As options premium sellers we tend to settle for small profits while risking much larger potential losses.  Novice traders are often pushed to the sidelines with busted accounts because they had not yet appreciated this commandment for successful traders or, at least, they did not know how to apply it.

It’s all about not losing money on your trades.  When the market moves against you, action is mandatory.  To respond to those unsettling market moves you will need a toolbox with several defensive tactics.  Dr. Summa provided those tactics over the weekend.  He then demonstrated that a bit of creativity doesn’t hurt either.

The reward for mastering this discipline is a stabilization of your equity curve.  Eliminate the breath taking drops in account value and replace them with a steady upward ascent.  It makes for a much smoother ride.

We had several members from TheOptionClub.com community in attendance.  I always find it rewarding to meet people face-to-face after corresponding on our message boards for several months, or even years.  Thanks for coming out!

Christopher Smith
TheOptionClub.com