lystn

Hey everyone, Kirk here again at Option Alpha and in this daily call, I want to talk about the prisoner of war psychology lesson that options traders should learn. This really comes down to understanding how people get through being prisoners of war which I was never a prisoner of war and I respect people who have been in that situation because I can’t even imagine what that's like. But when researchers went back and looked at how people got through prisoner of war type situations, being actually a prisoner of war or situations in which they were confined or in solitude or any of those situations where they were abducted and didn’t see daylight for days and weeks, how they got through that situation, the psychology behind that, it’s actually interesting to learn about how they got through those situations because I think it can ultimately help us become better options traders and here's why. When researchers did all of this research around people who are POWs, you would think that people who had insane optimism would have performed the best, meaning they had this insane amount of optimism that – “We’re going to get through this.” They’re always looking forward. They weren’t totally focused on – “I’m going to die. I’m not going to live. I’m not going to get out of this situation.” But they had an insane optimism to get through the situation, to find a solution, escape or just survive, whatever the case is. I would’ve thought initially just reading this when I first started reading some of the research on this, what I thought to myself, “How do people do this? Yeah, it’s got to be optimism. It has to be just an insane level of optimism.” But it wasn't. What I found in doing research on this because again, you guys don’t even know, but I geek out on all of this stuff. How I even got down this rabbit hole one day of researching how people survive POW camps, you probably don’t even want to know, but I’m just saying I geek out on a lot of this stuff, just trying to understand the psychology and the thought process and skills around success in all walks of life. And so, when I started doing the research on this and I found a lot of research on this, what I found is that people who survived POW camps or those types of experiences, yes they had optimism, but before they had optimism, they had a realistic assessment of their situation, however you want to define that. They realized they were in a really bad situation. Not to say that they looked totally down on the negative aspects of that, but they didn’t gloss over it and that I think is more important than anything else because what they found is that people who in these camps, as they studied all the participants when they got freed and when they were liberated, the guys who were just 100% down, “I’m going to die.” there’s no optimism, they didn’t survive or most of the time, they didn’t survive or if they did, they were totally messed up afterwards. The people who were 100% mind in the gutter didn’t really make it. The people who are 100% optimistic on the other hand, they didn’t really make it either because when things didn't go their way, when their optimism faded and then they realized they were in a really bad situation and things weren’t as great and they maybe weren’t going to be saved as quickly as they thought they were going to be saved, when that happened, then they started to fall apart. I mean, they just broke down. There was no structure, there was nothing. It seems like their optimism had this energy ban that lasted just long enough and whenever it broke, it broke hard. As opposed to the people who were kind in the middle, if you want to call it that, the people who survived did the best, that lasted the longest, that had the best mental state, that in most cases, came out of it with very few diseases, mental health issues actually did really well where the people who were optimistic, yes, but that actually took a realistic assessment of their situation first. They basically said to themselves, “Wow. I’m in a POW camp. I’m a prisoner of war. I’m a whatever. I might be here for a really long time.” They took a realistic assessment of that. “I might not get food, I might get beaten, I might get tortured, all these things, but I’m going to prevail.” It’s really what it came down to. As options traders, we should really take that same type of logical approach to how we trade the market. I think this is the big takeaway for me today, is I think about this and I think, “Too many people are way too optimistic or way too negative.” It's really one or the other. I am definitely an optimistic type of person. I have all upside potential for options trading. But before I look up, I look down. I often use that actually before in webinars. I tell people like, “Look down first. Make sure you're covering the downside risk before you all look up at all of the upside potential. Look down before you look up.” I think as options traders, we need to be reminded of that often and this POW psychology lesson maybe really helps because we should make sure we’re taking care of the downside risk. Really realize the situation that we’re in. Take a realistic assessment of where we are with our portfolio, with our trades in the market environment and then from there, start building off of that and figure out how we’re going to trade or what products we’re going to use, what strategies we’re going to use going forward, where we think the market might go and how that shapes our opinion, but don’t be totally optimistic that everything is going to be sunshine and roses. People get into this situation all the time where they come to me and they say like, “Options trading is going to be great. I understand it.” Then they have their first losing trade and then they’d just fall apart and they want to cancel and they don’t know what to do and it’s just like POWs who were just super optimistic, but didn’t actually realized the situation that they were in. As soon as they had one setback, they totally fell apart. I think that people who come also to options trading and are totally negative about it just don’t really give it an opportunity. “Everything is bad. The market is bad. Everything is rigged. No one is here to help. There's nothing for the little guy.” They don’t see the opportunity in anything and you just can’t help those people either. I just wanted to remind you guys about this today because I think it’s a different way to think about how we trade options and it’s not always the same black and white, “You need to do this and you need to do this.” There’s a lot of psychology, a lot of mindset in this and if you think about the prisoner of war analysis and case study today, I think that might help out and just as a reminder to look down before you look up. Take care of the downside risk, position size appropriately, make sure you’re balanced, make sure you have diversified ETFs and stocks in your portfolio and then you can start thinking about when to take profits and when to remove trades or adjust or all that stuff. That comes secondary to making sure that you control risk first. As always, hopefully you guys enjoy these. If you have any comments or questions, let me know. Until next time, happy trading!