Traders don’t know what they don’t know
When I first heard this statement, I didn’t quite get it. It seemed obvious that you can’t know something that you don’t know. But that wasn’t the point. We all operate at a level of “knowing”. Or maybe I should say we all work at a level where we think we know stuff, but we really don’t. So much of what we think we know is hearsay. We are just mouthing other people’s opinions. We take those opinions to be fact and then apply those “facts” in our own lives as if they were truths. However, when we do this, we have entered the twilight zone world of not knowing what we don’t know.
When I began trading Options, I didn’t have a clue about what I was doing. I thought I did. The market was going up and I was making some profitable trades , but I didn’t know that I didn’t know how to trade. The brokerage firm I was using at the time published a list of ideas and, since I had heard that selling options was more profitable than buying them, I picked the short selling trades that paid the highest (premium) credits. These trades were working fine. What could be better than that
But the more I traded the more I came to realize that I didn’t really know anything about trading. I was just trading what someone else told me to trade.Was it a good trade for me and my portfolio. I had no idea!
It hadn’t occurred to me to apply the same principles to trading that I learned,when I owned and operated my own Building contracting business. When you build a structure or remodel one for that matter, you have to go through a process. You don’t just “build” something. And it’s not a matter of luck, or having a friend tell you to just do this or that. You need to have a set of plans and some specs to get you from start to finish. You need to understand building material and tools and how to put things together.The same applies to trading Options. You can’t really appreciate Iron Condors unless you understand how they are built from put and call spreads. And you can’t really appreciate the spreads until you understand the basic building blocks – puts and calls.
What are Put and Calls
Puts and Calls are the basic building blocks used to design Option Strategies. A Call option gives the buyer the right, but not the obligation to buy the underlying at a specific price (strike) on or before the expiration date of the contract. Put options gives the buyer of the option the right to sell the underlying at the strike price on or before the expiration date of the contract. The buyer of these two options pays a price (premium) to acquire that right to buy or sell.