Trade The Journey

Trade The Journey

First Trade Psychology Post

Trader Psychology/Strategy

Symbol: XLF

Company: Financial Sector ETF

Reason for Trade: Looking for a weekly trade proved difficult, so I instead opted to go with a sector ETF. Sector ETFs are made up of several financial companies and its performance is based on the S&P 500 financial sector performance.

XLF was near a key support area of $30.35 that the ETF remained near for almost the entirety of the week before. My hope was that XLF would break through this level to the downside.

STRIKE: $30.5

Time Constraint: Weekly option

Profit: This position would incur a profit below the $30 level accounting for the $62 premium I paid for this weekly option.

Not accounting for the greeks:

Profit: $30.5- 0.62 = $29.88

Loss: 30.5 + 0.62 =  $31.12

Greatest threat: Time and a drastic move in the wrong direction. At a theta of 5.55, this position had to be right quickly, or the theta would eat my premium.

News/Economic reports: Job openings report, initial claims, and, employment situations report. The market is heavily focused on inflation and employment, so any news items pertaining to these topics would move stocks in one direction or the other.

How it played out:

XLF opened the week by testing the $30.35 level and immediately buyers stepped in and moved XLF from this key reference level. After seeing the action around this level, I should have closed the position immediately, but “Hope” got the best of me. I decided to wait for the job openings report results to see if it would move XLF below the $30.35 level.

It didn’t and to make matters worse, XLF gapped up and my position became a losing position. I ended up losing half of the premium with the position being nearly worthless by the second day. I closed the position at a loss.

Lesson:

Once I saw the activity around the reference level wasn’t to my expectation, I should have closed the position. “Hope” is a strong emotion and it’s hard to ignore when markets are as volatile as they have been. My “hope” was that things would turn in my favor. It didn’t work, and I suffered my second losing position in two weeks.

Psychology:

My last two positions were bearish because I thought the downside action would continue. I tried to place a bullish position a few weeks ago thinking the market would turn to the upside and headed down. I begin to chase the market without a clear sense of the market direction.

A part of me was upset with myself for placing a bullish options position when the chart clearly showed that downside action was more probable than upside action. Convinced I was right about the future market’s direction I stayed in both bearish options positions longer than I should have.

I also felt good about my probability of being right due to placing several profitable options positions in a row. I began to develop the belief that trading was easy and once again I received a market lesson.

Primary Emotion: Overconfidence and “Hope

Positives: I didn’t let the losing positions affect my confidence or belief in my trading skills.

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