Aha!

Sean McLaughlin
March 30, 2023

Aha! moments often occur when we are faced with a problem or a situation that requires us to think outside the box. They can happen when we are struggling to find a solution to a problem, and suddenly, a new idea pops into our heads.

Think about the story of Archimedes, who had an Aha! moment when he saw the water in his bathtub overflow. Suddenly, he realized that the volume of an object can be measured by the amount of water it displaces.

Another example of an Aha! moment is when we finally understand a concept that we have been struggling with for a long time. It can be a concept in mathematics, science, or even in our personal lives. For me, they often happen in my world of trading.

In fact, I would argue that a career spent engaged in trading the markets by definition is a career defined by hops from one Aha! moment to the next.

But here’s the thing – rarely are these moments a dip into groundbreaking territory. At least for me. I’m not splitting atoms or solving nuclear fusion. Far from it. In most cases, it’s a sudden new fundamental or deep understanding of a “truth” I’ve been beaten over the head with, or even repeated myself, ad nauseam, for years. I thought I understood it, but it was only a surface-level understanding. Now – finally — I really understand.

The resulting feeling is often embarrassment. “How could I have been so clueless about something so incredibly obvious?” Usually accompanied by a head slap.

This happens to me often.

I riff on and on about “defined risk” and “position sizing” and the importance of risk management. I’m pretty good at it. But not always great.

One recent Aha! moment for me occurred while I was iterating on an index options strategy which consists of an evolving collection of defined-risk vertical spreads.

I was too focused on my intraday PnL, letting it inform my decisions on when to make position adjustments. But I can’t control my PnL. The market determines how much money I make or lose. There’s a certain level of acceptance one must have in knowing this.

But what I can control is the level of risk I’m exposed to. And when I hold a position that is solely composed of defined risk vertical options spreads, all it takes is one look at my available options buying power to know what the value of my account will be in a worst-case scenario where I suffer the maximum loss in my positions. As long as I’m cool with that number, I’m good.

When I focus on THAT number – a number that doesn’t fluctuate up and down with every tick in market prices, a number that only changes when I make it change – there is a certain level of serenity that envelops me.

It is a wonderful feeling knowing there’s something important that I can control. And it’s probably the most important thing.

And once again, I’m embarrassed that it took me so long to internalize something so basic yet so important.

Aha!!

Trade 'em Well,

Sean McLaughlin
Chief Options Strategist
All Star Charts, Technical Analysis Research

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