There's a Difference between Failure and Fiasco!!

One of the advantages of living in Chicago is that from time to time you can run into successful traders that are willing to talk. In fact, just in our little office of a hundred or so there are quite a few. In fact Andy, the owner has a Gulfstream and a few multimillion dollar houses, all paid for from trading. Trading success is not foreign to me. However what I want to talk about in this post is about one of the more unique traders I’ve come across over the last several decades. This trader, we’ll call him Steve, is a net options seller. This means that he sell’s premium and is looking for time and interest decay over the period the option is active. What attracted my attention was the fact was that he was consistently successful. Month after month, year after year his results were predictable. When asked what the “trick” was that allowed him to be so consistently successful his reply astonished me. His answer was simply this, that he was “willing to be wrong 90% of the time”. This was certainly a new answer and one I hadn’t heard before. I’m sure you’ve all seen the ad’s that say their system is 80% accurate and promises to make a fortune with little or no money invested and here was a guy that I knew was making money – and a lot of it – and he was telling me that he was doing it and being wrong 90% of the time. This was just too good to pass up so I begged him to tell me more. He did. Steve went on to tell me that the vast majority of options expire worthless so the odds were inherently on his side on any given trade. That I understood and knew but then he went on to tell about an experience that happened in 1988 that forever changed his approach to the markets and it’s one that bears retelling. In 1988 the implausible and the impossible happened. The good ole’ U. S. of A. had an honest to god drought. Global warming worked that year, unlike this one. I can remember driving to work at 6 AM in the morning and it would already be 85 or 90 degrees. It was hot. It was also dry and it was early in the growing season. The effects were predictable; the Grain markets went up – a lot. Steve had his customary positions on – short both puts and calls – naked, meaning he had no protection in case he has wrong, because he had the statistics and odds on his side. Besides that, it was too early in the season to have a sustained rally of any substance go against him for any period of time. Well, here’s what actually happened. The market not went against him, it went way against him. The impossible happened and the Soybean market went to $1.099 ½ in late June before topping out. As Steve told it the move nearly bankrupted him. And for all I know it may have, he wouldn’t be the first trader to go bust and won’t be the last but here’s what he came away from the experience with which is more valuable than all the money in the world. “Kid” – he told me – “plan for the impossible”. “What I learned from 1988 is that if I’d simply adjusted the position accordingly I’d have been okay”. “I didn’t and it nearly killed me”. “So today almost every time I make an adjustment I’m wrong. I’d say 90% of the time”. “It’s hard to do knowing you’re probably doing the wrong thing and taking money out of your pocket at the same time. But what I’m doing in insuring against possible catastrophe, like the one that happened in 1988 in the Soybean market”. What he told me was he was willing to accept failure to avoid fiasco. “The moral to the story is that if you can stay in the game, you can win the game”. Steve’s point was well taken, what he meant was that during periods when you’re dead wrong the markets you need to be able to manage it. Control it. And accept failure to avoid fiasco. The implausible/impossible happens all the time and it has to be planned and accounted for. Again - If you can stay in the game, you can win the game. That’s the Treasury Income Engine motto and what I learned from a guy that makes 90% bad decisions by accepting failure to avoid fiasco.