Resolving to Remember the Value of Options

I don't know the pleasure of rigging a jib or the nuances of "coming about," but lessons in sailing must be similar: start small (like on a Sunfish), know where you're going, have good equipment and tools, don't take unnecessary risks, admit when you're lost and never think you can outmaneuver a mother of a storm.

Have a Strategy, Not a System

Never trust anyone who claims to have a system or promises gains. Trading is often analogized to gambling, but unlike poker, the global casino can always introduce a new and unexpected wild card in the middle of the game. Remember those really smart guys (including a couple of Nobel Prize winners) who ran the Long Term Capital Management hedge fund? They thought they had a system that could lock in winning positions. Then something happened that never happened before, and about $1 trillion was vaporized.

There are plenty of smart people out there in the market, making the possibility that you'll discover some overlooked method of locking in profits highly unlikely. Unless you're doing something illegal, most everyone is basically playing on the same field and bound by the same rules. Develop a winning strategy rather than trying to game the system.

The Decline and Fall of Volatility

Many active option traders have lamented this year's decline in volatility, which, as measured by the VIX, has dropped steadily from the 45% area to a seven-year low of 15%. Nearly 65% of all individual stock options have an implied volatility within 10% of their 52-week low.

Remember that the decline in implied volatility is an accurate reflection of the drop in real or actual volatility -- the S&P 500's 60-day historical volatility is down to a mere 11%. As the lack of large price swings presents fewer big hits, the majority of people should view this as a great opportunity to add options into their trading strategy.