Risk Management Crash Course:

"There are many old traders, there are many bold traders, but there aren't many old, bold traders."

Bold traders: "I had about 8 or 9 sizeable option positions on Cable (£/$) — in relation to a/c size — in April 2022, as the worst UK Retail Sales figures were released since records began! Many with short Days to Expiry (DTE) of less than a week, some a few weeks. I crashed my account, writing off my gains and more. I had no way of charting all those positions and tracking my P/L or more importantly, my risk exposure. UK Option Broker platforms are basic and not like Think or Swim or Tasty Trade.

With the positions breaching their Strike prices (leaving an approximate 50% probability of some of the options still expiring worthless), I maintained the challenged Short Puts. This is why understanding Gamma is so important.

In reality defending positions in adversity is something that I think many traders can relate to including even the best of us:

Two trading examples come to mind, Nick Neeson's long Nikkei trades before the Japanese Kobe earthquake and Brian Hunter who nearly took down the Amaranth Hedge Fund in the U.S. when he was short natural gas futures in the lead up to 2005's Hurricane Katrina.

Leeson's hiding of his true financial trading position finally led to Barings Bank being sold for £1... Hunter kept buying the dips in the hope of averaging down his losses, only to increase them to the tune of $7bn!

Puts and Calls should theoretically react to volatility in the same way but in reality you may need to Sell Short 2 or 3 Calls to cover the losses made when the Puts explode in price due to increased volatility (Vega).

The lesson learnt is: Never defend. Instead cut the damaging Short Puts quickly and roll out, either down in Strike selection or out in time or both to maintain the Strangle and/or sell more OTM Calls.

Standing our ground in adversity is written into our DNA. It is why we're still here as a human race... but it spells disaster for a trader with losing positions. The opposite corollary is that when faced with a reward, we seize our opportunity too early… i.e. we take profitable positions off too early.

Why?

It's wired into out DNA. It's why as a species we're still here 500,000+ years later. Life was hazardous for Hunter-Gathers and spearing one gazelle out of a herd and dragging it back to the bushes was the safest choice when competing with other predatory prey!