09 Apr Are you an Option Buyer or Seller?
THERE ARE TWO TYPES OF PEOPLE IN THE WORLD
After many years in the options markets, I’ve found that traders tend to take risk in a way you can observe in their lives. Here we ask “Are you an option buyer or an options seller”. Let me explain the difference by introducing two friends: Betty and Samantha.
Betty takes very careful steps through life. At street corners, Betty waits patiently on the sidewalk for the light to change. When the light changes, Betty’s gait is never rushed. She’ll get to her destination. She knows this. Worst case scenario, she’ll be a few minutes early.
Betty has more insurance coverage than anyone I know. But she says, “Hey, I sleep at night.”
Betty orders the same thing every time we meet for dinner. She says, “Hey, this way I know I’ll enjoy my meal.”
Samantha is always in a hurry. At street corners, Samantha stands in front of the crowd, halfway in the street, perched as though she’s waiting for the starting gun, ready to begin her Manolo sprint across the street.
Samantha has only catastrophic insurance coverage. She’d rather spend her money going skydiving. She says, “Hey, I’m having fun. Life is about today.”
Samantha tries very strange food. She says, “Hey, I’ll experience something exciting and new. Who knows? I may just LOVE it.”
Me? I don’t judge. But this much is clear: Betty is risk-averse. In her trading style, she’s an option buyer. On the other hand, Samantha is a risk-taker. In her trading style, Samantha is an option seller.
I’ve used extremes to illustrate my point, real life is more subtle and more mutable. But I wanted to illustrate the type of character traits you can look for.
AN EXPERIMENT FOR YOU
Try observing people in this same vein. You will find these tendencies in many areas of your life.
- Option buyers buy insurance; they want to know the most they can lose.
- Option sellers are insurance companies. Collecting premiums to take on obligations is comfortable to them.
EXERCISE & SELF-ASSESSMENT
Observing the human tendencies of others will assist you in seeing your own tendencies.
- The resultant self-observation will show you where your biases in options trading will be (buyer or seller).
- It may also result in an overall assessment of how you approach markets: this often changes as we have more to lose.
Another result of observing others is to be able to determine if your risk level depends on your environment or mood.
- Understanding your cognitive biases will help define your rules of trading.
- Getting out of your head and using “real world” observations of other people can increase self-knowledge. How you use the information can strengthen your trading plan – and hopefully your results.
Give it a try… Have some fun with it.