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Web of Finance
218 hits
| May 10, 2002 1:20 am |
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Lessons from Blackjack |
Guan Seng Khoo
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Some Lessons From Blackjack
I recently went to the Beau Rivage for a short vacation. While I was there I ate, slept, laid out at the pool, and of course gambled. I play blackjack and craps. The reason I am writing about my trip is not to tell you about the resort but to tie in similarities of gambling and investing. The question has been raised by many uninformed people “Is option trading like gambling?” Don’t fret; I am not going to tell you that options are like gambling. In fact, I am probably the one of the biggest advocates in favor of options.
The first day in Biloxi was like a day of the FOMC meeting. I didn’t play until the last thirty minutes of the day. Instead, I played horrible golf and saved my money for better conditions. If you have been to a casino, you know that losing a big chunk of your money the first day is no fun. When in doubt, stay out. The first night I learned the biggest lesson of thew whole trip. In fact, it was this night that I realized the similarities between gambling and trading. I sat down and got all the right cards. So I buy in for at a blackjack table and in a short time I am up 250%. I had a gut feeling that I should get up. In fact, I even told my dad that I was up a lot and should go. Stupid me kept playing because I got greedy. I gave back $250 in 5 minutes and called it quits. The lessons I learned are; take you money and run, don’t get greedy, and the free drinks aren’t really free. So I still went to bed a winner.
Day two I started out losing. By noon I lost a lot. My problem was that even though I realized that the cards were bad, and my stack of chips was shrinking, I wouldn’t get up. When I would get back to even I wouldn’t get up. Anyone who knows about gambling knows that if you break even you are doing really well. Similarly, an option position can be identified as bad if upon initiating if it immediately drops or goes down and back to even. Jim has made a great analogy for this type of position with the bus ride. If the position is dropping or even hovering around even territory, exit it and initiate a new position. The idea is that if that bus isn’t on the right route, then you need to change buses. Furthermore, if the bus is about to go over a cliff, jump out the window. A few broken bones (dollars) are not as bad as death (broke). In addition, if the position goes down and back to breakeven territory, reanalyze the position because it may not stay at even for long. I actually had this happen where the position went up enough to cover the spread and a little slippage. I tried to get in between the spread with no result. So I realized the struggle the position was having going higher (the volume, intraday momentum and trend, support and resistance) and lowered the selling price to breakeven less slippage. The underlying security then dropped to 66.125 from 78.625 in a week.
So day three started out to be good because at one time I got back to even for the trip. But I was foolish and stayed on that “Bus” and lost even more. So I stopped playing until later that night and went to work. I analyzed the process and the trends just like the market and found a game plan that worked great. I determined that I was most successful in the market when I would take many small gains on different positions instead of playing the long-term trend. The long-term trend refers to all the ups and downs your option premium makes over a few months. It is also the times trader’s leaps are profitable and traders don’t take the profit because they have all of this Time and the security is speculated to have this large move. I am sorry, but in my opinion, this is wrong and greedy. Buy time for insurance not because you plan on holding onto the position a long time. Time is your foe. I will get off my soapbox by saying that I found that more success at the tables when I would sit down with my plan, stop losses, and profit targets. I also applied trailing stops. I probably got up too soon a couple of times, but that is just like “sell too soon” and “you can never go broke taking profits.” The story ends happily with me jumping from one table (position) to the next until I made back all I lost plus a little extra in just an hour and a half. In review, change positions if it is struggling to stay even or it is dropping (stops), take small profits on positions with some time ‘til expiration, and don’t get greedy with your profits hoping for more. As with trading, don’t buy in (invest) with your whole bankroll (assets) at one table (position). Diversify your assets and trade with your speculative money that you can afford to lose. The answer the question “Is option trading like gambling?” is determined by each reader’s trading conduct. On a final note, there are three ways to lose money in the market (casinos): hope, fear and greed! Good trading to all.
Robert John Ogilvie
ROgilvie@gunnallen.com
Neither GunnAllen Financial, Inc. nor Robert J. Ogilvie makes any representation as to the accuracy, reliability or completeness of any charts, formulas, and /or research opinions presented herein. This article is intended solely for educational purposes. Nothing herein should be construed as an offer or solicitation to buy or sell any securities. GunnAllen Financial is a Member of the NASD and SIPC. Please read the Optioninvestor.com’s Disclaimer.
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