Why Option Traders Should Sit On The Sidelines For 90% Of The Game

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As kids, we never wanted to be left out of the game. We enjoyed getting in there and playing hard.

But as investors we should relish in the ability to sit quietly on the sidelines and do more watching than playing.

It was put best by the famous Jesse Livermore who said "It was never my trading that made me money in the market, but rather was always my sitting tight."

Have those words ever been truer than they are today? With the parabolic rise in small speculator trading (both stocks and options) over the past ten years, we have found a crowd that truly enjoys the thrill of the game rather than the outcome.

I Enjoy The Views From The Bench

Trading more has recently become synonymous with the so-called "smarter" trader. I disagree.

Even with the recent horrible month for equities you can see why smarter money might have actually been on the sidelines watching and drinking beer while everyone else is trying to cover their positions.

In my personal trading, I have often found that I'm best when nimble and patient. Waiting is often more likely to be a better trade at times than LONG or SHORT. When the right set-up presents itself, attack aggressively and manage risk.

Our Case Study

To drive home the point, I'll start right here with our own Premium Membership. To start out the first quarter of this year, we were trading very light. 1 to 3 positions per month at most - hardly active.

Stocks continued to inch higher, and volatility was in the teens, so trading they way we don't make any sense. Sure you missed a huge run up in stocks but that wasn't our game plan.

When the market started to enter the current correction in early May, I began to more aggressively invest. Volatility was on the rise, and the trades I wanted to make were now available. Even if we continue to see selling, this June will be a great month for our members.

The point is that I wasn't going to force trades into the market just for the sake of trading. Why should we trade just to say we have a position? Isn't it better to wait for the right position than to hope for the wrong one to turn around? I sure as hell think so.

Start The FREE Course on "Options Basics" Today: Whether you are a completely new trader or an experienced trader, you'll still need to master the basics. The goal of this course is to help lay the groundwork for your education with some simple, yet important lessons surrounding options. Click here to view all 20 lessons ?

My 90/10 Trading Rule

Though I haven't spent money on doing a major study of options traders around the world, I would strongly assume that more profitable traders spent 90% of their time on the sidelines in most cash. The other 10% of the time would be when they saw 2-5 opportunities each year to put a lot of money to work with favorable risk/reward ratios.

I would also strongly assume that 10% of the traders out there make 90% of the money. You've probably commonly heard of the 80/20 but I believe it's even more lopsided in the financial markets would you agree?

Cast Your Vote Via Comments

Let us hear what you have to say. Do you think you make/save more money sitting on the sidelines or do you think actively trading each week/month is more profitable long-term? Cast you vote now in the comments section!

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. 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 three children.