The systems of successful traders are as wide and varied as the traders themselves. But they all possess one essential element: edge. Consider it the reason why the system produces profits over time. Many traders make money. Some know the specific edge of their system. Fewer still can articulate it.

Here’s an example. The Condors for Cash Flow system has printed profits over time. So says extensive backtesting as well as real-life experience. The reason (its edge) is because it capitalizes on the overpricing of options. While its possible that the edge disappears in the future, I’m betting it won’t. Because fear is what creates pumped-up premiums and that particular emotion is unlikely to leave so long as humans call the shots. A system that is perpetually short perception and long reality is well designed to thrive. And, well, that’s what the Condors for Cash Flow does.

Okay. We’ve identified the edge and articulated why it’s sharp. Then we thought through what type of environment that would make it dull.

Let’s take a look at another example. You’re a swing trader, a gunslingin’ stock picker. Spotting low-risk, high-reward setups is your bailiwick and buying options is your weapon of choice. What is your edge? Why should buying calls and puts around quality patterns work? The answer is skill. Pure and simple. See, buying calls and puts doesn’t have an edge. Not by default. If anything, they have a negative expectancy. The means they are only a money-maker for eagle-eye traders with top-notch timing tools and quality management skills.

So what could blunt the edge of an option buying system? Aside from simply losing your touch for stock-picking it could be a change in market conditions. In choppy, volatile markets, price pattern failure rates rise. Follow-through, the crucial element that makes option buying work, goes away and mean reversion rules the day.

Here’s another way to look at it. Buying calls/puts for directional plays works well in a healthy, up trending, low volatility market. It doesn’t work well when prices trip, correlations rip, and overnight gaps multiply. In other words, the kind of environment we’ve seen over the past two months.

If you are unable to recognize when market winds have shifted, when the environment has turned unfavorable to your beloved system, then pain and perhaps doom, await.

For this type of swing trading option buyer, I suggest adding some rules to the system that dictate which environments are okay to play in and which ones aren’t. Maybe let the 50-day moving average and the VIX be your guide. When the S&P 500 is trending above the 50-day and the VIX is subdued it’s game-on! Green light. When the market tumbles below the 50-day and the VIX launches skyward it’s break time. Red light.

If you seek consistency, build a system. If you want a good system you need an edge. If you don’t know what your edge is, then figure it out! How? Through learning and tinkering, backtesting and forwardtesting. We’ll be talking about edges in tonight’s Cash Flow club.