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.

  • “Even if you are 100% right on your directional assumption you could still lose” – Happened 20+ times in 2013 alone :-(

  • dmk

    Kirk – good article. I’ve been pondering this a little more, how does volatility come into play when selling puts vs calls? I would think that it has more effect on puts since as the VIX goes up so do the premiums on the puts since typically the market is going lower. As a result, the calls will drop in value. So in low vol environment why can’t you still sell call credit spreads? What we’ve been seeing over the past months is a drop in VIX and a parabolic move to the upside that has gotten me in trouble but I think it comes down to risk management and getting out of the trades with a minimal loss.

    • Thanks! Typically you are right. As volatility expands so does the put side more often. However, check out TSLA. This stock jumped and so did volatility though it didn’t fall. So you can see it doesn’t always work just to the downside. Selling any spread in a low volatility environment is just a bad trade – you still have to get too close and the market can always continue to run higher (we are seeing this right now too!).

      • dmk

        Yup TSLA is a crazy one, even with high IV there if you sold calls last week you’re still fried!! If you bought ATM 85 calls on 5/13 when the IV spiked for $10.50 you can sell them today for $26!! So is that a case where selling high IV did not work?

      • Actually I would have sold a strangle on this in which case you would take in a higher premium to account for the move up.

  • Not all time. Look at TSLA right now which had the stock pop up and so did volatility

  • mohan e

    but how do i find out whether a stock is in Low volatility or High volatility period ?

    • Just look up the implied volatility and plot it over time in your broker’s platform

  • Harsh Patel

    Hey Kirk,
    This is your fan from india…wanted to ask that during low volatility period, if we can sell options one month farther and not the same month, then we can get good premium and more importantly we can safely be farther away from spot price…and when the current month ends, we can square off the position and we could eat the premium…is it possible?

    • Thanks for the comment Patel! Even during periods of low volatility you shouldn’t be selling options and spreads. Going further out in contract months can help but you are still selling low volatility which could increase and leave you with a big loss.

  • Yep we are talking about low volatility relative for each stock. So generally below 25 IV rank is very very low – even for GOOG and TSLA