The Gambler and the Gardener

Our last couple of transactions are perfect illustrations of two approaches to trading.

Most people -- and certainly most of the news media -- approach the markets as though they were a casino. You stride up to the roulette table, place your chips on a number, the wheel spins, and as a gambler you either win or lose.

A trader in the casino style opens a position, and sells for a profit or a loss. But there's only one simple round trip: Open the position, exit it, and tally the result. There's no difference between this approach and gambling on a lottery ticket.

Our recent trade in GE was like that: We opened a position in the shares, they became profitable, and we sold for a win.

Market professionals that I've known tend not to see their positions as a gambler would. Rather, they treat each position as a rare, tropical flower, to be nurtured in the garden until it flourishes.

If the position somehow moves into losing territory, the pros don't sell the position. That would be tantamount to seeing a brown spot on the leaves of your rare tropical plant, pulling it up by the roots and tossing it on the trash. Rather, the pros ask: How can this position be saved? How can I nurse this plant back to health?

That's why professionals trade stock options. They offer so many possibilities for mitigating a position, and bringing a loss back to a win. My recent selling of a covered call to fix an unprofitable position in UNG, is an example of the gardener approach.

I do both gambles and gardening, and my choice is usually dictated by the clarity of the signals. UNG's position was ambiguous: The signals said "Yea" and the price said "Nay". So I chose to keep the position but to also add to my likelihood of turning a profit immediately: The gardener approach. GE's position showed a clear bear signal, supported by the price movement. Since it was profitable already, I chose the gambler approach, otherwise known as "take the money and run".

Could a gardener approach to GE have also worked? Sure. I held the position as a bull put spread (long the DEC 15, short the DEC 16 puts). It would have been possible to add some calls that would convert the position into an iron triangle bracketing the trading range of the past few days, or even buying back the short put and retaining the long put to capture profit from the decline.

Whether tending trades as a gardener or whipping through them as a gambler, the result can be a loss. Gardening in no safer than gambling in the context of the markets. But the goal of both approaches is identical: Turning a profit on each trade.