If you’re an options trader, you might not think much about whether you have a balanced portfolio. It’s not really something active traders talk about, but – as in most aspects of life – balance is important.
We know it, too. Yet, we often find ourselves out of balance. When we lean too far to the left or the right, it’s easy to fall over. When we are in balance, we can plant ourselves in a solid position. Only powerful forces can knock us over, physically and mentally.
Being firmly centered and rooted is an important goal in all aspects of life: diet, relationships, sleep, work and leisure time. It is achieved through moderation, which I know is easier said than done! But if we take things in moderation, we avoid the risk of extremes.
How to achieve a balanced portfolio
When it comes to trading, a balanced portfolio allows us to dampen volatility. How do I do this?
1 – I protect my portfolio
I carry put option protection to help balance out a heavily-skewed bullish portfolio. This will lower overall volatility and allow me to sleep better at night. If something funky happens to the markets, I am prepared.
2 – I keep emotions in check
Some things in trading are uncontrollable, like price action. I know there is nothing I can do about it, and I accept that. Yes, I care about price action, but I don’t respond to a change as if my life were at risk.
A few days ago, I was talking about balance with my good friend and fellow trader Dawn Thibodeau. Her advice is so spot-on, I am sharing it with you here:
“We can teeter totter between fear and greed countless times in a day. Always shooting for home runs can leave your portfolio absorbing many intense losses. The emotional rollercoaster this creates paralyzes our ability to make rational decisions or see opportunity. Why do we lack balance in trading?
“It can be lack of will power, which like anything else, just needs to be exercised to grow. Or the belief that you are the exception, not the rule. Trading is an ocean of probabilities. You are not the outlier. Like any healthy relationship, you must respect it if you want it to respect you.”
