Option Sizing, Dean The Grinch And A Funny Story On Him

“I have heard there are troubles of more than one kind. Some come from ahead and some come from behind. But I’ve bought a big bat. I’m all ready you see. Now my troubles are going to have troubles with me!” — Dr. Seuss 

When I was a licensed broker and financial consultant in Coral Gables, Florida, my office was right next to another broker’s named Dean.

Dean was about 6’ 6” and wore kind of a friendly scowl on his face, which matched his cynical sense of humor to a tee.  He always reminded me of the Grinch in the Dr. Seuss book, although he was a much nicer variety — and never stole Christmas that I was aware of.

But Dean knew a lot about the business.  I always suspected he started as a broker around the age of two.  And he traded some pretty heavy duty accounts, by which I mean in the million dollar variety.  And some of the transactions were options plays.

His advice was to not go crazy with options.  By that he meant, if your normal position size when buying stock was 100 shares, then just trade one to three options (remember that one option controls 100 shares).  In other words, don’t load up on options to the level of 1000 to 2000 shares when your normal stock trade is usually just 100.

He said this was one of the biggest mistakes he saw clients make, and I agree.  It’s sound advice, so keep it in mind when you are putting on a trade.

Now to the funny story.  We had nice ground level offices with full windows facing out to the street, so we could do a bit of people watching while we were trading, and full windows on the opposite wall so we could see clients and others walking down the hall.   There were full walls on the left and the right, so we had privacy as well.

In any event, one day I heard Dean say “Ahhh, Shoot,” or something similar to that (chuckle) and I saw this 6’ 6” monster Grinch go flying down the hall about Mach 3 toward the Wire Desk.  I swear his feet never touched the floor.

A few minutes later he walked back by my office, wearing a bit of perspiration but looking much relieved.  I asked him what happened.

It seems Dean was putting on a multi-million dollar bond trade, or as he said, “putting on something with some real juice behind it,” and accidentally entered it backwards.  He realized his mistake right after he hit the enter key which prompted his high speed airborne trip down the hall to the Wire Desk.

They were able to reverse the trade at no loss.  So the story had a happy ending.  And of course, a lesson as well.  Which is that both professionals and amateurs make mistakes, but professionals catch them before they get serious.

If you have a trade that is starting to go south, best to do the professional thing and get out, before you compound your losses.

And don’t go crazy buying a boatload of options all at once.  Go easy and do the Dean Thing.  No, not the BACKWARDS BOND Dean Thing – the other Dean Thing.

Just buy, or sell, a FEW options for starters.

To your health and prosperity – John

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