One of the most common mistakes for traders, and those with tastyBITE sized accounts, is to increase size at the wrong time. Becoming overconfident is a mistake in many aspects of life. A trader who becomes overconfident will increase his trading size at the wrong time and for the wrong reasons. When should a trader increase size and when should a trader not increase size and why? Why can increasing size in a tastyBITE-sized account prove especially harmful?
We like to short option premium using strategies with a a high Probability Of Profit (POP). We frequently will experience winning streaks of several successful trades in a row. Such success can easily turn into overconfidence. A table displayed the historical results of selling SPY Strangles. The table included the win rate (90%), average winning P/L ($90), average loss ($475) and expected P/L after 10 trades ($335).
A table of doubling our Strangle size after 5 wins, 7 wins and 9 wins was displayed. The table included the percentage of trades at 2 contracts, the theoretical P/L after 10 trades and the theoretical loss expected assuming 1 loser out of 10 trades. The table showed that sizing up after 9 wins created a negative P/L after 10 trades and that inconsistent sizing can result in large losses. Tom and Tony noted, “the time to scale is when you have a greater opportunity (higher IV and IVR). the time not to scale is when you are on a hot streak.”
For more information on Trade Sizing see:
Market Measures from January 28, 2016: "Importance of Consistent Trade Sizing"
Options Jive from March 21, 2016: "Probabilities | Why Occurrences are Important"
Options Jive from May 2, 2016: "Trade Size | Staying Consistent"
Watch this segment of tasty BITES with Tom Sosnoff and Tony Battista for the important takeaways and to learn when and why should we increase our size and the danger of doing so at the wrong time and in the wrong way.
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