#1. Don’t go home short gamma.
Funny Wall St. Journal article article by James Altucher, too bad VN didn’t follow his pupil’s lessons – specifically #8 below.
Victor Niederhoffer blew up a few times by being short gamma. He mustn’t have tested that ethos despite how smart he is, and I’m not being sarcastic.
I have nothing against Victor Niederhoffer personally, but his book The Education of a Speculator has to be the second-worst book I’ve read after Liar’s Poker.
Popular? – Yes, both are.
Classics? – Not in my paradigm.
The upside to all of this is that I did incorporate a new rule to my book-buying system: never buy a hardcover without having read a good portion of it first at the bookstore (now a free chapter on the Kindle). So for that, I have to thank Victor Niederhoffer.
The best book to understand the Greeks (such as Gamma) would be Tony Saliba’s Option Spread Trading Strategies: Trading Up, Down, and Sideways Markets.
Listen to my Tony Saliba pocast interview.
From the WSJ article (I don’t pay for news fyi):
8.) Always Protect the Downside.
This is learned by negative example. As Nassim Taleb has pointed out ad nauseum, Black Swans occur. (See the Malcolm Gladwell article on Taleb to see Taleb’s thoughts on Victor.) No matter how much you test, there will be a “this time is different” moment that will force your bank account into oblivion. I trade a strategy based on selling puts and calls at levels where my software thinks its statistically unlikely the market hits those levels before the next options expirations day. But I also use some of the premium I earned from selling those puts and calls to buy slightly further out puts and calls as insurance the market doesn’t run away from me. No matter how confident the software is, always protect.