Why You Should Treat Your Options Trading Portfolio Like a Business

When I first started my options trading journey, I approached each strategy independently.

My goal was simple: I entered each trade with the intention of making it a winner, without considering what my other trades were doing.

Initially, this mindset seemed logical. Each trade was a separate entity, and I measured success by the outcome of individual trades. If a trade won, it was a success; if it lost, it was a failure.

However, this narrow focus overlooked a crucial aspect of trading: the interplay between different positions within a portfolio.

When viewing options trading from the business perspective, this approach is akin to employees who focus solely on their own tasks, oblivious to how their work fits into the broader goals of the team or organization.

The Issue with Viewing Each Option Strategy in Isolation

1. Lack of Synergy

Just as employees working in isolation miss out on potential synergies, individual trades viewed in isolation fail to benefit from the complementary effects of other trades.

2. Increased Risk

Focusing on individual trades without considering the overall portfolio can lead to overexposure to certain risks.

For instance, having multiple trades that react negatively to the same market event can amplify losses.

3. Missed Opportunities

A narrow perspective might miss chances to balance risks or boost returns through strategic diversification and hedging.

Advantages of Treating Your Options Trading Portfolio Like a Business

It was only recently that I realized the importance of treating my portfolio as a whole, much like how a successful business operates.

This shift in perspective is akin to recognizing the value of team members complementing each other with their strengths and weaknesses.

Here’s how this new approach has transformed my trading:

1. Risk Management

Viewing the portfolio as a whole allows for better risk management. Each trade contributes to the overall risk profile, and understanding this can help in balancing the portfolio.

For example, if one trade exposes the portfolio to significant downside risk, another trade can be structured to offset this risk.

2. Diversification

A holistic view encourages diversification.

Instead of putting all eggs in one basket, different strategies can be employed to spread risk across various sectors, asset classes, or market conditions.

This reduces the impact of adverse movements in any single area.

3. Synergy and Complementarity

Trades can be designed to complement each other.

For example, pairing a conservative strategy that hedges against market declines with a higher-risk strategy that benefits from market upswings.

The gains from the conservative strategy can provide a cushion against potential losses from the high-risk trade, creating a more balanced and resilient portfolio.

4. Long-Term Success

Ultimately, this holistic approach fosters long-term success.

By focusing on the health and performance of the entire portfolio, rather than individual trades, you build a robust framework that can withstand market volatility and adapt to changing conditions.