The Worst Possible Trades You Could Ever Make – 2 Real Examples

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Strong statement right? I can back it up and will in this blog post.

There are many 'bad' trades but today I'm going to focus on 2 of the worst possible trades.

And just to be 100% clear this has nothing to do with market direction. Some would say that the two worst possible trades would be to buy when the market falls and sell when it rallies. Though these aren't ideal, I beg to differ.

The Failure Of Trading Direction Over Strategy

When folks come to me for options coaching, I prefer that they don't have a background trading stocks. Those that do tend to have already developed the habit of picking the direction as the sole way to profit.

Buy stocks and the market rallies = you make money. Sell stocks and the market falls = you make money.

Simple and straightforward, right? Sure it is, just ask someone who day trades profitably - oh wait you can't find anyone? That's what I thought.

Trust me I get it! For those who get started in the investing world, this is the natural path to take. The path of least resistance per say.

But in the options trading universe it is Strategy that trumps Direction.

The right strategy with the wrong directional assumption will still profit consistently over time. That being said, let's find out more about these two types of trades you should never make.

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# 1 Selling Options During Low Volatility

In periods of low volatility whether in the overall market or particular stocks the worst trade you can make is to be a net seller of options. This doesn't mean you should sell options as part of a particular strategy but rather than you should be collection premium overall.

Some of the strategies that would fall into this category include Iron Condors, Credit Spreads, and Short Strangles.

With low volatility, you're forced to get closer to the market for the same premium, effectively taking on more risk. Besides, which way can volatility go once it's already been crushed? Up!

There is little to no edge in this market environment which makes it so unattractive.

#2 Buying Options During High Volatility

On the complete flip side, you have those Cowboys who buy options during high periods of implied volatility. How quickly they forget that you are paying that additional volatility premium in the option's price.

And once again when volatility is high there is only one way for it to go and that DOWN!

Even if you are 100% right on your directional assumption, you could still lose because of the drop in volatility. Ever had this happen to you before? Of course, you have - it happened to me also.

So what strategies should you avoid in this type of market? Buying Single Options, Debit Spreads, and Long Strangles.

Your Turn To Vote. . .

Add your comments and let me know which factor is more important to your success; the right Strategy or the right Direction?

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and two daughters.