Options Theory: The Search for Certainty | Tackle Trading: The #1 rated trading education platform

Options Theory: The Search for Certainty

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Some answers are sweet-sounding and satisfactory. They bring comfort, like being wrapped in a blanket by the fire in the dead of winter. Others are disappointing. Like finding out your blind date is a he when you were expecting a she. Why oh why did your parents name you Ashley, good sir? But the truth is the truth. And while sugar coating it might make you feel good in the short run, it will undoubtedly poison your financial health in the long run. It sets up false expectations and, inevitably, disappointment.

I have one particularly vexing truth in mind today. It deals with the elusiveness of certainty in trading. Because the future is in flux and the markets come down to odds and probabilities, certainty seekers can find it extremely frustrating.

I can think of numerous applications to this principle. Here are a few.

Bear Markets

Bear markets are nasty beasts – volatile, unruly, and mean-spirited. Sometimes they arrive like a thief in the night, but usually there are warnings signs. These clues allow you to take action before the rummaging robber takes off with your entire treasure chest.

So, how do we know when a bear market begins? How do we differentiate between a garden-variety correction and the birth of a drag-out bear market a la 2008?

Unsatisfactory, yet totally truthful answer: you don’t!

Sure, I could quote the -20% threshold that Wall Street uses as the definition of a bear market. But identifying that the market is 20% off its highs tells you much about what just happened and little about what will happen.

The best you can do is improve your situational awareness and prepare. If you’re unsure on how to do that, well we wrote an entire course on it. Improving your situational awareness involves better grasping where we’re at in the market cycle. The preparation side consists of knowing how to protect your dough and respond when the bear market strikes.

But never forget, no one knows the exact date and time of the next bear. And its magnitude, how far it will fall – yeah, that’s shrouded in mystery as well.

What Should My Portfolio Look Like?

I get this question all the time. Or one of its siblings is, “How do I make X per month?”

Unsatisfactory, yet totally truthful answer: I don’t know.

Here’s the elaboration. The only certain reward (read: risk-free return) that exists in the market is what’s available in short-term Treasuries. The 3-month T-bill is usually what Wall Street uses. And right now it sits near 2.20%.

So, you want $22k a year, risk-free? Simple. Buy $1 million 3-month T-bills. And, of course, pray the Fed doesn’t drop rates (spoiler alert: they will) over the next year so you can maintain the 2.20% return.

You can find high yield savings accounts or CDs that pay a comparable amount.

What’s that? You don’t have $1 million? And you want more than 2.20% annually? Oh, well then you’ll have to take risk in some fashion.

And, I suppose you’d like some guidance for that part, a more satisfactory answer for how to structure your portfolio or at least attempt to make X per month.

Well then. Let’s crack open Pandora’s box.

Pandora’s Box

Oh, snap. I just hit my word count target for these weekly missives. It looks like we’re going to have to pick this up next time. But don’t worry. This is a blessing in disguise. Rather than settling for a few brief ideas on the topic, I’ll be able to do a deep dive. It’s going to be fun!

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2 Replies to “Options Theory: The Search for Certainty”

  1. AdibRahnaman says:

    Thanks, Tyler

  2. DavidVelasco says:

    Looking forward to it!

Comments are closed.

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