Nope… I’m not kidding. There is a real phobia that revolves around the decision making process. Just Google decidophobia and you’ll see. Most traders are all too familiar with the symptoms of this debilitating condition, but few know that there is a name for it. Think back to the first time you made a trade. Remember how you looked at the chart and were absolutely certain that the stock was moving up? You started filling out the order ticket and a flicker of doubt crept into your head? You looked at the chart again blinked your eyes and realized that you may have made a mistake in your analysis? Yes, yes, wow, that was close. That stock was heading down and you almost placed a bullish trade. Nice catch! Here we go again with the order ticket – this time to the downside. Okay, the order ticket is filled out, you are about ready to click on the “send order” button. You notice that your hand on the mouse is shaking and you can hear your heartbeat in your ear drums. Maybe one more check of the chart before placing the trade. Before your very eyes the chart seems to start to dance, looking bullish for one moment and then switching back to be bearish the moment. The chart is now looking “Bularish.” You stand up from the computer station and think this is probably a good time for another cup of coffee — you know, something to clear your head. Does this situation sound familiar? If so, you might be suffering from decidophobia (and your trades may be suffering because of it).
If you can relate to any of the above comments, I have a suggestion to help you reduce your fear of making trading decisions. I’d say that most of the fear that accompanies trading stems from the fear of being wrong. New traders and even seasoned traders who are experiencing a period of struggle within their investments can often feel like they have to be right every time they enter into a trade. Being wrong with regard to choosing a stock direction can hurt you financially as well as be a knock to the ego. When you place a directional trade you have a one in three chance of being correct on the direction aspect. No matter what, there is always a chance of being wrong when you enter a trading position.
But, what if you could increase your odds of being correct by a third? What if you could execute a trading strategy that would give you a two in three chance of being correct? What if you could employ a strategy that would allow you to profit if the stock moved up or down? If we can eliminate the issue of evaluating direction, I believe that those suffering from decidophobia would have a little easier time with trading.
Here’s my prescription for investors suffering from decidophobia; master the art of the option straddles. An option straddle is a trade where a trader buys call options and put options at the same time. A call option is a derivative that, when purchased, will increase in value if the underlying asset increases in value. A put option is a derivative that, when purchased, will increase in value if the underlying asset decreases in value. If an option trader enters into a directional trade, he or she can purchase a call or a put. When placing a straddle trade, the option trader is going to buy a call and a put. When the straddle is placed, the trader is no longer interested in direction. Instead, it is all about movement.
A straddle trade can result in a profit if the underlying asset moves significantly up or down, but if the stock moves sideways, the trade will lose money. For this reason straddles are best used in correlation with events that are known to cause increased volatility in a stock’s price. Earnings announcements are ideal opportunities to place straddle trades.
Earnings season can be a time of great frustration for traders due to the wild price swings that accompany earnings reports. Some traders will treat earnings announcements like a trip to Las Vegas as they blindly put all their chips on red and then just let it ride. Other traders will avoid trading during earnings season because a 50/50 shot of being right with regard to the market’s “earnings report reaction” is not smart trading in their eyes. On the other hand, an option trader looking to straddle welcomes this volatility. By placing a straddle, the option trader has the unique ability to position themselves so they do not care which direction the stock moves – it just needs to move. For this reason, traders wishing to straddle the market should aim to choose stocks that have a history of making dramatic moves following their earnings announcements. If you can identify these types of stocks, your decision to make the trade should become easier.
The basics of placing a straddle are as follows: A straddle requires the trader to buy equal numbers of “at the money” calls and puts. If you are not familiar with options it is important to understand that options expire. It is important to choose options that will give you some time for the trade to work out if your profit does not show up overnight. From experience, one to three months should be a sufficient amount of time to let this process complete itself. The other consideration when placing a straddle is when to actually place the trade. One mindset on the subject is to place the straddle during the trading session prior to the announcement being made. For instance, if the earnings information will be released prior to the market open, the trade should be placed the day before. If the earnings numbers are to be released after the close of the market, then the straddle can be placed just before the market closes. The second school of thought on placing straddles is to place the trade two to four weeks in advance of the earnings announcement is release. The idea here is that as the earnings announcement draws closer, the cost of the options will increase with the anticipated volatility that increases the demand for that option. If you can purchase the options before this demand increases, the trade could cost less as the options are cheaper and you stand to make a greater return on your investment.
Although there are a few more details you should learn about straddles before implementing this strategy, the point is this that if you have difficulty deciding which direction a stock is going to move, you might consider taking that question out of the equation altogether by learning to straddle the market properly.