Catastrophic Loss (Part 2)

Last time I discussed more positives than negatives about my trading business. Today I want to inch closer to this concept of catastrophic loss.

When catastrophic loss happens I try to do a postmortem to better understand exactly what happened. I try to find pearls that will prevent it from happening again. I often come up with a checklist: things to watch for each and every day to make sure I am avoiding potential landmines.

Unfortunately, I believe even the best laid plans sometimes cannot avoid catastrophic loss. When histograms of trade returns are plotted, most results end up somewhere in the middle but a few will locate far to the left (i.e. Black Swan). Maybe it’s a cost of doing business? Perhaps it’s just a necessary evil of trading. As luck (randomness) often giveth, (bad) luck may also taketh away. At the end of the day, if Green > Red then it might be “winner winner chicken dinner.”

One thing I find tricky about the trading business is that catastrophic loss can happen at any time. I find my head must always be on a swivel because in retrospect, the rough times always came out of nowhere and occasionally to a staggering extent. Sometime I should tell the GC story. The whole motivation for writing on this subject now is because of what happened last month with stocks. From August 18 to August 24, the market fell 9.3%. While that is surprising, what happened to volatility is utterly earth-shattering: up 212% in five trading days!!! 

That’s enough to destroy many option traders who are trying to play the odds.

Hell, that was the first time I ever used red text in this blog! If that doesn’t say it all…

Not a typo: up 212% in five trading days! I need a break.