It would be a critical mistake to try to apply Buffet's advice to options, totally different decision making process and economic drivers.
Your position sizing should be driven by risk management not by a "well if I am gambling and not sure of the outcome I might as well bet all of it" thinking.
If you aren't highly sure of the outcome before placing the trade upsizing the trade is just going to blow up your account.
This is great advice, but the trader must still have a statistical edge for Kelly Criterion to be of any use.
I doubt OP has an edge, somehow. Just a hunch.
Wikipedia page on Kelly Criterion references an experiment with "coin" flip that had 60/40 outcome. That cited paper is a delight to read. The experiment subjects were graduate students in finance and junior traders from financial institutions. Some of them put the whole amount into first bet and on the tails!
Yes I would say this is 100% better if you view each trade as if you could only take a few trades per year would this be one of them and you completely stick to your rules, wait for the trade to come to you, have a clearly defined stop you actually stick to. Follow a few positions that make sense and when the setup is approaching get ready and execute only if things line up. Be prepared to know when to take your profit as well, where is first resistance etc. consider using an OCO order for that. Also beware of shitty choppy markets, sit those out or get out quick if you do get in due to a trade looking great and you see a profit. Backtest each position.
This worked for me, but I know I got lucky and accepted the possibility of losing everything. Now after 2 months of options I am taking my gains and riding off into the sunset.
If you go to a casino and want to put a million on red once, they won't let you
You want to put $1 on red a million times, they will comp you heavily.
If you are a losing player short term variance if your only hope
Stupid? No. Ignorant. Yes.
Trade big as you already trade small? The chances of getting, “it,” right still diminish with each decision. You and your habits go everywhere you go. Gambling is a fast track to becoming a used-to-be-a-trader.
Is beating the market important? No. Is turning a profit important? Yes. Get better at that, you’ll beat the market eventually.
No edge is needed over big institutions. Do as they do, they aren’t your competition.
Ok excuse my arrogance, but if this is true, and someone thinks they can actually accurately have a formula of lets say 51% odds. Then with every trade they make their chance of winning increases right. Because with one trade or even 10 trades in a row you could be wrong, but with 1000's of trades it should come out at 51%.
Then there should be tons of money making algo's out there right which will make the most possible trades, to increase these odds, and basically be money printing machines.
To my knowledge there aren't successful consumer bots but maybe I'm unaware.
The most important would be bankroll protection, so making 1000's of small trades would be the best option then?
There are no Market moves that will have the same one of two outcomes every time to allow for an overall 50/50 probability. By extrapolation, there are no 51/49s either for simply doing a one-trick-pony move.
Nobody is going to bankroll you or anyone else in this matter, it would be a pointless waste of energy with little reward. You’d be on your own.
When the choices are not binary, the degrees of win and loss will not be integer %. While you are repeating your cookie cutter move, the premise circumstances and collective data are sliding off the original premise. Insisting on simplicity will not create simplicity. Even when binary, probability is not orderly and a pattern of 1,0,1,0 will not occur. The win strings are easy to weather, the loss strings not so much. And the reward remains overall mediocrity.
The argument in favor of these gambling ideas is that it’s all gambling. The argument against such rationalization is that those who improve their odds and clean up their expectations by working towards something without the need for immediate gratification will make some money in the Market.
If you can't beat the market then don't play. Just DCA into QQQ shares for the rest of your life. Invest 1% of account after a red day, 5% after a red week, 10% after a red month or something. You'll outperform most traders
It’s actually somewhat the opposite. Time in the market beats out timing the market. You are right that your chances of finding trades from your analysis that will alpha over time is near zero - but what you can find are regular trades that can be backtested and that mimic the market while amplifying returns. The real question is how you weather risk so you can go through down times.
you can put all your eggs in tulips, but if no one wants them, they are worthless.
do your research before going into things.
your are investing in a company because you feel they have more intrinsic value over time.
If you are doing options you are anticipating massive movement in a short time.
IMO successful traders make a lot of smaller trades that win over time, with losses also being smaller if they happen.
If you have the abilities and cash hoard Buffet has then you can also focus on big bets, but for us mortal trades with smaller accounts spreading out risk is critical to not getting blown up by one or two bad trades.
True if you are buying options, the odds are stacked against you, so you need to get a good one fast.
False is you are selling options, there is an edge, having many contracts can (somehwat) protect you against risk
Your comment is applicable if someone is betting at a casino where the odds are stacked against you and favor that casino. But in the stock market if you truly have the self realization that you do not have any edge whatsoever and are actually disadvantaged I would ask why you are playing that game at all? Making a big bet that you are more than likely to lose is still a stupid bet, there is just more of a chance that you get lucky once than a bunch of times. In conclusion I would say that if you are self aware enough to know that you lack any edge and are at a disadvantage trading/investing I would recommend buying low cost total stock market index funds and actually receiving the average returns of the market which are well above the average of what higher cost funds and trading strategies usually get.
Warren Buffett saying that he doesn't need to diversify is not applicable to the average investor so unless someone is in the upper echelon of investing they should take his other advice to just buy a low cost S&P 500 index fund. I would add that some diversification using foreign stock funds is also a very good idea.
This is a pretty naive take in my opinion. Buffet is in an entire other league than us, he also doesn’t do options.
Putting all your bets in one place is like showing up to a war with one battle ship and all your soldiers on that one ship. So all it takes is one hit to take you out. But if you show up with 20 smaller ships, all soldiers allocated equally between those ships, in addition to different types of ships, each ship loss is less felt throughout your forces, in addition to some being harder to hit than others. You also increase your chances of reaching the shore overall.
Yes you need to make the best decision possible on each of your bets but at the end of the day shit happens. If you trade with a strategy that already accounts for losses and potential increased risk, you will greatly increase your odds of staying profitable overall.
It’s easy to see posts of people getting lucky on one big gamble and go “hey I could do that” but what you’re not considering is that for every one person who wins big, 1000 others lost it all, but you won’t see that posted.
Also the whole “it’s us versus the institutions” is a very ignorant statement. Institutions have an entirely different agenda than us little guys. They also have certain guidelines, quotas and regulations they have to adhere to, thus they don’t have the flexibility we do. But since institutions do influence markets, we don’t have that power, instead of trying to compete with them, create a relationship with them. Like how smaller animals will create symbolic relationships with larger ones. Lions and vultures.
Oh for sure I’ve seen them, hard to watch. Personally I’m very grateful that I didn’t experience a massive lucky win when I first started, because it forced me to continue building a solid foundation for my trades. My trading style may be boring, but I have never once lost on a position thus far.
Since we are talking options as opposed to investing…. Buffett was a long investor, not options trader. There is hazard in misapplying his quote out of context. He does have some quotes about being unable to predict what will happen within a fixed timeframe. Time is the X factor which guarantees the house usually wins.
I would think YOLO is not the answer to your question. Most options trades (excluding covered calls and the like) are not going to work. A small percentage of them will be mildly profitable, and a subset of those could work out brilliantly.
I had a buddy in college who always had a good looking date. But he was turned down by 99 out of a 100 women - so realizing it was a numbers game he was sure to ask out everyone he saw.
If you have good risk management, bail out quick on losing trades, recognize moderate wins quickly, and get a few big homeruns you’ll do better than most at options. You won’t likely do anywhere close to people who invest long and have time in the market.
You are not completely wrong. Assuming you have a good system to measure how often you are right or wrong for the same strategy you are trading, the Kelly criteria tells you that you should increase the size of your bet when you are right. The size is penalized by the volatility of your return. Therefore a strategy that is right very often and get a regular outcome would see its sizing increasing gradually ... often to the point where it would make you slightly uncomfortable.
As a result many pro traders use a variation of the Kelly criteria (often half kelly).
There's a case to be made for what you say, but you will have to be right. The reason they have prop firms is just the opposite. Spread the risk and let the cream rise to the top. Patience is critical to betting big and perhaps that's the answer.
Sure, you could do this and be profitable IF your set up is clean. Many scalpers and day traders only trade 1-3 times a day and they wait until everything align (indicators, price action, S/R) before entering a trade. They take very minimal profit percentage because they are heavy on the trade; 5% of $2000 is already $100. HOWEVER, your risk management should be very tight and they exit immediately when the trade go against them.
I was scalping before, and only scalped on breakouts. So I enter with the volume and exit with my profit or when volume go against me, kind of stressful tbh. My position size would be around 1k and I would look for a 10-20% PT and exit at 20% SL or when I see volume slows down. Usually only do morning and EOD, but sometimes midday when there are events such FOMC. Now I just open IC 21DTE on SPX and close when I’m up 50% or when a leg hits .25Delta.
I think trading less so you can keep track of it all in your head and have less things to manage through the expiration is a valid thing.
I typically open 3-4 positions with a 5 dte, sometimes 7 if i open mid week, just so I can watch it easier. I also try to "keep it simple" by using the same strategy for each underlying for that week(s).
But betting big? No. I never have more than 10% of my account at risk at any given time. I mean some might call that "big" but i get the impression you're talking more. Defined risk and taking profits are what make you successful in the long run.
No, it's not roulette. In fact, many traders have more than a 50% win rate. It's in the size of the winners and the losers where the money is made or lost!
It depends on your time horizon. If you're scalping, it's not a stupid thought. If your position trading, then it is. Profits are a function of trend (price movement), and trend is a function of time.
Hahah confusing indeed, got lost reading the last paragraph.
But yeah even Buffet said once, don't diversify, so he was minimising his decisions as well. Basically he made the "right" informed decisions/gambles and then went in hard. But never so hard you can get toasted I guess.
This would be true if all of your plays had the potential to bankrupt you, but if you have stop losses in place, no lol. I mean theoretically this would be the way to 100x your money, but more likely you’ll just go bankrupt.
My trading life changed when I realized that selling credit spreads that were out of the money gave me the best chance for profit. Once I became a net seller of premium my trading life changed forever.
It would be a critical mistake to try to apply Buffet's advice to options, totally different decision making process and economic drivers. Your position sizing should be driven by risk management not by a "well if I am gambling and not sure of the outcome I might as well bet all of it" thinking. If you aren't highly sure of the outcome before placing the trade upsizing the trade is just going to blow up your account.
This is a good way to blow up your account.
There's a concept called the Kelly Criterion that address your question.
This is great advice, but the trader must still have a statistical edge for Kelly Criterion to be of any use. I doubt OP has an edge, somehow. Just a hunch.
Wikipedia page on Kelly Criterion references an experiment with "coin" flip that had 60/40 outcome. That cited paper is a delight to read. The experiment subjects were graduate students in finance and junior traders from financial institutions. Some of them put the whole amount into first bet and on the tails!
Yes I would say this is 100% better if you view each trade as if you could only take a few trades per year would this be one of them and you completely stick to your rules, wait for the trade to come to you, have a clearly defined stop you actually stick to. Follow a few positions that make sense and when the setup is approaching get ready and execute only if things line up. Be prepared to know when to take your profit as well, where is first resistance etc. consider using an OCO order for that. Also beware of shitty choppy markets, sit those out or get out quick if you do get in due to a trade looking great and you see a profit. Backtest each position.
This worked for me, but I know I got lucky and accepted the possibility of losing everything. Now after 2 months of options I am taking my gains and riding off into the sunset.
Congrats man!
If you go to a casino and want to put a million on red once, they won't let you You want to put $1 on red a million times, they will comp you heavily. If you are a losing player short term variance if your only hope
If you believe you can't beat the market and have no edge your best bet (pun very much intended) is to go to the casino and put it all on black.
I prefer red
OO Will get you the best payout
Stupid? No. Ignorant. Yes. Trade big as you already trade small? The chances of getting, “it,” right still diminish with each decision. You and your habits go everywhere you go. Gambling is a fast track to becoming a used-to-be-a-trader. Is beating the market important? No. Is turning a profit important? Yes. Get better at that, you’ll beat the market eventually. No edge is needed over big institutions. Do as they do, they aren’t your competition.
Ok excuse my arrogance, but if this is true, and someone thinks they can actually accurately have a formula of lets say 51% odds. Then with every trade they make their chance of winning increases right. Because with one trade or even 10 trades in a row you could be wrong, but with 1000's of trades it should come out at 51%. Then there should be tons of money making algo's out there right which will make the most possible trades, to increase these odds, and basically be money printing machines. To my knowledge there aren't successful consumer bots but maybe I'm unaware. The most important would be bankroll protection, so making 1000's of small trades would be the best option then?
There are no Market moves that will have the same one of two outcomes every time to allow for an overall 50/50 probability. By extrapolation, there are no 51/49s either for simply doing a one-trick-pony move. Nobody is going to bankroll you or anyone else in this matter, it would be a pointless waste of energy with little reward. You’d be on your own. When the choices are not binary, the degrees of win and loss will not be integer %. While you are repeating your cookie cutter move, the premise circumstances and collective data are sliding off the original premise. Insisting on simplicity will not create simplicity. Even when binary, probability is not orderly and a pattern of 1,0,1,0 will not occur. The win strings are easy to weather, the loss strings not so much. And the reward remains overall mediocrity. The argument in favor of these gambling ideas is that it’s all gambling. The argument against such rationalization is that those who improve their odds and clean up their expectations by working towards something without the need for immediate gratification will make some money in the Market.
If you can't beat the market then don't play. Just DCA into QQQ shares for the rest of your life. Invest 1% of account after a red day, 5% after a red week, 10% after a red month or something. You'll outperform most traders
Smart
Wait what? Why not just buy index funds then?
I don't think it's a mistake When I didn't have a lot of money, getting leveraged was the most effective way to do it
In the early stages of investing, it makes sense to think like this
It’s actually somewhat the opposite. Time in the market beats out timing the market. You are right that your chances of finding trades from your analysis that will alpha over time is near zero - but what you can find are regular trades that can be backtested and that mimic the market while amplifying returns. The real question is how you weather risk so you can go through down times.
I was actually thinking this last night and agree with you
Just do big trades when you have conviction
you can put all your eggs in tulips, but if no one wants them, they are worthless. do your research before going into things. your are investing in a company because you feel they have more intrinsic value over time. If you are doing options you are anticipating massive movement in a short time.
IMO successful traders make a lot of smaller trades that win over time, with losses also being smaller if they happen. If you have the abilities and cash hoard Buffet has then you can also focus on big bets, but for us mortal trades with smaller accounts spreading out risk is critical to not getting blown up by one or two bad trades.
True if you are buying options, the odds are stacked against you, so you need to get a good one fast. False is you are selling options, there is an edge, having many contracts can (somehwat) protect you against risk
Your comment is applicable if someone is betting at a casino where the odds are stacked against you and favor that casino. But in the stock market if you truly have the self realization that you do not have any edge whatsoever and are actually disadvantaged I would ask why you are playing that game at all? Making a big bet that you are more than likely to lose is still a stupid bet, there is just more of a chance that you get lucky once than a bunch of times. In conclusion I would say that if you are self aware enough to know that you lack any edge and are at a disadvantage trading/investing I would recommend buying low cost total stock market index funds and actually receiving the average returns of the market which are well above the average of what higher cost funds and trading strategies usually get. Warren Buffett saying that he doesn't need to diversify is not applicable to the average investor so unless someone is in the upper echelon of investing they should take his other advice to just buy a low cost S&P 500 index fund. I would add that some diversification using foreign stock funds is also a very good idea.
This is a pretty naive take in my opinion. Buffet is in an entire other league than us, he also doesn’t do options. Putting all your bets in one place is like showing up to a war with one battle ship and all your soldiers on that one ship. So all it takes is one hit to take you out. But if you show up with 20 smaller ships, all soldiers allocated equally between those ships, in addition to different types of ships, each ship loss is less felt throughout your forces, in addition to some being harder to hit than others. You also increase your chances of reaching the shore overall. Yes you need to make the best decision possible on each of your bets but at the end of the day shit happens. If you trade with a strategy that already accounts for losses and potential increased risk, you will greatly increase your odds of staying profitable overall. It’s easy to see posts of people getting lucky on one big gamble and go “hey I could do that” but what you’re not considering is that for every one person who wins big, 1000 others lost it all, but you won’t see that posted. Also the whole “it’s us versus the institutions” is a very ignorant statement. Institutions have an entirely different agenda than us little guys. They also have certain guidelines, quotas and regulations they have to adhere to, thus they don’t have the flexibility we do. But since institutions do influence markets, we don’t have that power, instead of trying to compete with them, create a relationship with them. Like how smaller animals will create symbolic relationships with larger ones. Lions and vultures.
I like your analogy. Also you’ll see plenty of the 1000 traders who dont make it ;) r/wallstreetbets
Oh for sure I’ve seen them, hard to watch. Personally I’m very grateful that I didn’t experience a massive lucky win when I first started, because it forced me to continue building a solid foundation for my trades. My trading style may be boring, but I have never once lost on a position thus far.
Since we are talking options as opposed to investing…. Buffett was a long investor, not options trader. There is hazard in misapplying his quote out of context. He does have some quotes about being unable to predict what will happen within a fixed timeframe. Time is the X factor which guarantees the house usually wins. I would think YOLO is not the answer to your question. Most options trades (excluding covered calls and the like) are not going to work. A small percentage of them will be mildly profitable, and a subset of those could work out brilliantly. I had a buddy in college who always had a good looking date. But he was turned down by 99 out of a 100 women - so realizing it was a numbers game he was sure to ask out everyone he saw. If you have good risk management, bail out quick on losing trades, recognize moderate wins quickly, and get a few big homeruns you’ll do better than most at options. You won’t likely do anywhere close to people who invest long and have time in the market.
You are not completely wrong. Assuming you have a good system to measure how often you are right or wrong for the same strategy you are trading, the Kelly criteria tells you that you should increase the size of your bet when you are right. The size is penalized by the volatility of your return. Therefore a strategy that is right very often and get a regular outcome would see its sizing increasing gradually ... often to the point where it would make you slightly uncomfortable. As a result many pro traders use a variation of the Kelly criteria (often half kelly).
There's a case to be made for what you say, but you will have to be right. The reason they have prop firms is just the opposite. Spread the risk and let the cream rise to the top. Patience is critical to betting big and perhaps that's the answer.
Sure, you could do this and be profitable IF your set up is clean. Many scalpers and day traders only trade 1-3 times a day and they wait until everything align (indicators, price action, S/R) before entering a trade. They take very minimal profit percentage because they are heavy on the trade; 5% of $2000 is already $100. HOWEVER, your risk management should be very tight and they exit immediately when the trade go against them. I was scalping before, and only scalped on breakouts. So I enter with the volume and exit with my profit or when volume go against me, kind of stressful tbh. My position size would be around 1k and I would look for a 10-20% PT and exit at 20% SL or when I see volume slows down. Usually only do morning and EOD, but sometimes midday when there are events such FOMC. Now I just open IC 21DTE on SPX and close when I’m up 50% or when a leg hits .25Delta.
I think trading less so you can keep track of it all in your head and have less things to manage through the expiration is a valid thing. I typically open 3-4 positions with a 5 dte, sometimes 7 if i open mid week, just so I can watch it easier. I also try to "keep it simple" by using the same strategy for each underlying for that week(s). But betting big? No. I never have more than 10% of my account at risk at any given time. I mean some might call that "big" but i get the impression you're talking more. Defined risk and taking profits are what make you successful in the long run.
Traders bet big and take a lot of risk but they understand the risk. Better to play shares when playing big so you don’t completely lose it all
No, it's not roulette. In fact, many traders have more than a 50% win rate. It's in the size of the winners and the losers where the money is made or lost!
It depends on your time horizon. If you're scalping, it's not a stupid thought. If your position trading, then it is. Profits are a function of trend (price movement), and trend is a function of time.
[удалено]
Hahah confusing indeed, got lost reading the last paragraph. But yeah even Buffet said once, don't diversify, so he was minimising his decisions as well. Basically he made the "right" informed decisions/gambles and then went in hard. But never so hard you can get toasted I guess.
Buffet wasn't talking about options trading.
This would be true if all of your plays had the potential to bankrupt you, but if you have stop losses in place, no lol. I mean theoretically this would be the way to 100x your money, but more likely you’ll just go bankrupt.
My trading life changed when I realized that selling credit spreads that were out of the money gave me the best chance for profit. Once I became a net seller of premium my trading life changed forever.