"Water, water everywhere...not a drop to drink"
So much can be going on in the economic, financial, and political world on a daily basis....it seems that there should never be a reason to NOT be trading something. Years ago, there would be days I'd be sitting in the pit, doing a crossword, just watching paint dry. Granted, volumes were nowhere near what they are today, I had to yell to get markets on the screen, and I wrote down every trade for time & sales.
This being said, whether it is 1995 or 2002 or even days like today, one of the main temptations a trader must cope with is the inevitable BOREDOM TRADE. It's the trade that takes place when nothing major is happening, or there is no real mis-priced opportunity, or when one just feels he/she must do something in an issue. These are the trades that, when executed half-heartedly and managed minimally, can get a trader into a lot of trouble.
Just today, one of the main pre-earnings focus stocks was AMZN. During the Mid-day Pit Report, Mark illustrated a trade which, funny enough, a number of upstairs traders around me were similarly constructing. The talk in the report was mainly based on reading the order flow and judging which direction the paper thought stock was headed. Now, even though it had somewhat seemed bullish in direction, we know that all it takes is a hedge when buying options and the position craves ANY type of movement whatsoever.
When I left the office after close, I got a text from a colleague saying AMZN was down $17. I stopped and thought back to the Pit Report when Mark had the graph of the condor up saying something like, "THIS IS NOT WHAT I WOULD WANT TO HAVE ON".
After shrugging my shoulders and grinning to myself how Mark possibly saved quite a few of us some dollars on this (GO OPTION PIT), I thought back to some of the main teachings of my early theoretical classes as a trainee (which still hold strong today).
Today, AMZN illustrated how a boredom trade could go terribly wrong. Volatility got into mid forties, the ATM straddle around $11.40 (at the time), and most all strikes skew-wise were very in line. Though there was quite a bit of volume, it was very hard to find a level to get in and create a trade to spread against it. The market was up solidly all day, with a slight retreat when the S.E.C. announced a broadened investigation into Goldman, but for the most part it was an uneventful. To throw in another classic line of "smooth water runs deep", even though we thought things were calm and somewhat positive with AMZN having average numbers, the floor falls out and the condor we thought we'd collect a nice little credit on gives us the max loss.
This proves no matter how busy or slow it is; full attention and analysis must go into each and every trade put on. Only then can we, as traders, look at volatility, judge breakevens, watch for warning signs, and confidently build positions that make sense.
-Odi
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