Selling Commodity Options: The Disposition Effect & Trading Psychology
In selling commodity options* or any other type of trading, the disposition effect is the tendency for an investor to take profits too quickly while holding on longer to losing trades. And holding the losers too long is just another way of saying the trader reverts to hope as a strategy. This disposition effect is like a trader volunteering for a slow and painful disappearance of funds. Behavioral studies suggest that the two most influential factors in making trading decisions are genetics and experiences. Oddly, some of the things that are good in life can work against us when trading.
As children, most of us are taught and even encouraged to be hopeful, optimistic, and not to dwell too long on the negative. Unfortunately, this training can be fatal if adapted into your investment strategy. Persistence is not a binary trait for humans that we turn either “on” or “off.” Almost every trader has had the experience of projecting their own hope and persistence on to a losing position. Our persistence is one end of a sliding scale with something very similar to stupidity at the other end of the spectrum. Furthermore – almost all of us are too quick to blame ourselves when a trade goes bad – though most often the circumstances to blame are beyond our control. To cut losses at a reasonable point often requires us to immediately suspend all hope and optimism, while at the same time having to admit our trade, in spite of our best efforts – just isn’t working. I must learn to fight only the battles I can easily win. If you can’t learn to exit trades properly without taking it personally, you will get ping-ponged between fear and greed while you are losing your money. This is both painful and very expensive.
Don A. Singletary is an author of financial articles and books and an educator, After a 25 years as a corporate commodity hedge consultant & corporate trainer specializing in commodity options in risk management plans, he now produces educational corporate and personal training material.
This former broadcaster, writer, and broker – now publishes a newsletter dedicated exclusively to selling commodity options.
**Seasonal Disclaimer: There are usually underlying fundamental circumstances that occur annually that tend to cause the futures markets to react in a similar directional manner during a certain calendar period of the year. Even if a seasonal tendency occurs in the future, it may not result in a profitable transaction as fees and the timing of the entry and liquidation may impact on the results. No representation is being made that any account h as in the past or will in the future achieve profits utilizing these strategies. No representation is being made that that price patterns will recur in the future.
Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.
This is not a solicitation of any order to buy or sell, but a current market view provided by Cannon Trading Inc. Any statement of facts here in contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgement in trading.
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