As we continue our discussion on trading as a form of combat I want to take a look at a subject that many of you might find odd coming from a fighter pilot -- managing risk. Yeah right Whiz, risk is your middle name. Not true. Fighter pilots are probably the most risk-averse people you will ever meet. Hollywood hasn't helped us out much, so let me eliminate the Hollywood Top Gun stereotype once and for all. If a Naval aviator pulled a stunt similar to any of those portrayed in that movie, it would be his or her last flight. They'd lose the gold wings on their chest, and maybe even their lives. Those stunts in the movie were dangerous; they were risky. Actually, they were stupid too. But believe me when I tell you that flying fighters is not that dangerous, it's not that risky. It's actually quite safe, if you're professional and have the required discipline to execute. If you don't believe me, see for yourself. Let's take a look at a typical work day in my old office as I fight one of my squadronmates over the Republic of Texas. Check it out here: Whiz Dogfight . Just another day at the office right? Did that look dangerous to you? Here are some of the reasons why it wasn't. The preparation for this flight started the moment I saw my name on the flight schedule the day before. I hit the gym for the required night before pump, then home for good chow. Hit the rack early and then work up early to head into the squadron. For an hour and a half before the flight, my wingman and I briefed for this mission. We covered everything from the weather to potential emergencies. We covered the rules of engagement, or ROE, which outline what we could and could not do during the fight. The aircraft was readied for the mission by expert maintenance personnel, utilizing comprehensive checklists and procedures. As you watched the clip, you probably heard a bunch of beeps and radio calls. Most of the radio calls were my wingman and I conflict on our flight paths over the radio. At one point, I called "high" and he called "low," indicating where our jets were going because while the engagement started at a high air speed, you could tell that we were maneuvering the jets as hard as we could and when jets get slow they sometimes don't go where you want them to. We were warning each other -- hitting each other is on the bad side of the good/bad scale.
The tones you heard were indications from the flight control system alerting me that I was fighting the jet right on the edge of controllability. The jet was warning me and letting me know exactly what flight regime I was operating in and how much closer to the edge of the envelope I could push it. You heard a female voice caution that said, "Bingo, bingo." This let me know I had a couple hundred pounds of gas to play with before I had to knock-it-off and head home. So actually, this wasn't too dangerous was it? But there was also one big risk missing. We weren't shooting real missiles or bullets at each other. This was a training sortie. During combat, we talk about something called the "fog of war," where the unknown unknowns reside. But even in combat that's OK, because I'm going to eliminate all known risks - if I'm gonna get smoked in combat, it's going to be because of something I couldn't control or mitigate, or in trading parlance, a Black Swan event. So I approach the subject of risk management with a unique perspective. I spent years in what many see as the most dangerous profession on the planet: flying fighters off the pointy end of aircraft carriers, in bad weather and at night -- close to 400 times -- while carrying out 40-plus combat sorties over enemy territory. Since then I have taken up a career in what would appear to be one of the riskiest businesses around: options trading. But like the fighter pilot profession, perception is not reality. Options traders also want to avoid risk. We integrate discipline and risk management so we can achieve superior execution. This unique and unparalleled experience has allowed me to meld the best of both worlds into a risk management system I'm certain can help you in your investing. You can take an inside look at the Top Gun Options program for more details. At Fox3 Options, we employ a proprietary risk management methodology forged in combat and proven on Wall Street.
Firing Line: We'll take a look next week at how we quantify and manage risk as we continue our discussion on combat trading. Happy hunting and make sure you hedge!