Introduction: A New Way of Thinking

Every now and then, a mental model comes along that changes the way we think about our actions and decisions. Today, we’ll explore one such mental model – the concept of the ‘Investor’ and the ‘Borrower’.

These two characters aren’t necessarily the central figures of a complex financial thriller, but rather archetypes that symbolize contrasting approaches to decision-making, specifically in the arena of options trading.

The Investor and Borrower: Understanding the Dichotomy

The ‘Investor’, as the name suggests, is a longer-term thinker. This character is unafraid to delay gratification in the name of potentially larger, future rewards. The Investor’s mantra is akin to the British saying, “Patience is a virtue”, underscoring a willingness to endure today’s sacrifices for tomorrow’s gains.

Conversely, the ‘Borrower’ is a short-term thinker, constantly seeking immediate pleasure even at the cost of long-term detriment. The Borrower often indulges in ephemeral joys, akin to savoring a fast-melting ice cream on a hot summer day – it’s all sweet and pleasurable until you realize it’s all gone, leaving you yearning for more, not to mention the health-damaging outcomes it comes with down the road.

Options Trading: Investor vs Borrower Strategies

In options trading, we often see these two archetypes materialize in the form of strategic decisions. A growing trend among traders is the preference for Zero Days To Expiry (0DTE) strategies. This approach is the epitome of the Borrower’s mindset – it promises an exhilarating action-packed experience and immediate gratification of outcomes. However, like a summer fling, it’s often fleeting and sooner or later, leaves one in a precarious position as the ability to repair the damage by adjusting positions when gamma runs rampant is limiting.

On the other hand, more calculated, Investor-like traders tend to lean towards long-dated options with the right expiries, typically beyond 30 days. This strategy might appear less glamorous initially, much like opting to run a marathon instead of a 100-meter dash. It requires patience, strategy, and a thorough understanding of the market’s ebbs and flows and how these relate to and impact the Greeks of your position. But the end result is often well worth the wait, providing steadier and improved returns.

The Philosophical Take: What it Truly Means to Be an Investor

Beyond the surface, being an Investor in options trading is a philosophical approach. It’s about understanding that success, whether in life or trading, is a marathon, not a sprint. It’s about acknowledging that enduring a delay in gratification short term does improve the chances of longer-term success.

Investors, through their actions, embody stoic philosophy – they control what they can, accept what they can’t, and distinguish between the two. They understand that in the grander scheme of life, and indeed in options trading, the ability to delay gratification can serve as the foundation of lasting success.

Striking the Right Balance

The goal, however, isn’t necessarily to always be the Investor and never the Borrower. After all, life without a bit of spontaneous joy would be dreadfully dull. However, one can afford to adopt the Borrower’s mindset only when it is a byproduct of hitting certain outcome thresholds for the month or quarter. In other words, you can indulge in the immediacy of the Borrower, but only by utilizing the extra profit made – a sort of reward for achieving the set financial milestones.

The real wisdom lies in understanding when to adopt the Investor’s prudence and when to revel in the Borrower’s immediacy. It’s about knowing when to play the long game and when to capitalise on the quick wins – perhaps as a reward for hitting a particular target. It’s about maintaining a high ratio of Investor to Borrower behaviour without aiming for an unrealistic 100% compliance with the Investor mindset.

Remember, the Borrower can add some excitement to the journey, but only when they are a reward, not a constant companion.

Practical Example with Iron Condors

Let’s translate this into practical options trading, focusing on iron condors on the IWM. The Borrower strategy might tempt you to opt for a 0DTE or 1-week option expiry, seducing you with the potential for quick returns. However, this approach severely limits your flexibility to manage the trade, given the compressed timeline and the inherent risk due to the high gamma component. The losses incurred in a poorly managed Borrower strategy can quickly escalate, much like the ballooning interest on a short-term loan.

Instead, the Investor strategy goes for a 45-day to expiry (DTE) iron condor. This might seem less thrilling on the surface, but it provides a significantly wider berth for trade adjustments. By giving your position the gift of time, you’re enabling it to weather market fluctuations and reducing the chances of incurring a loss due to unexpected market moves.

This is akin to planting a seed and patiently nurturing it. While the immediate results may not be as eye-catching as those of a fully grown plant, the rewards reaped from your patience, care and consistent nurturing can far surpass the fleeting beauty of a cut flower that withers quickly.

In short, the Investor strategy, with its delayed gratification and long-term approach, significantly increases the odds of a favorable outcome when trading iron condors on the IWM. It’s a classic case of embracing the short-term pain of waiting for the long-term gain of robust returns.

Conclusion: Embracing the Investor Mentality

As you navigate the vibrant world of options trading, challenge yourself: Are you functioning predominantly as an Investor or a Borrower? How can you lean further into the mindset of an Investor and minimize your Borrower tendencies? What steps can you take to engrain the Investor approach into your trading style?

In wrestling with these questions, you’ll cultivate a more profound understanding of your trading approach and strategy. Remember, trading isn’t solely a game of numbers and charts; it’s a challenge of patience, a journey in delayed gratification, and a perpetual lesson in discipline.

In the realm of options trading, your overarching objective should be to fully embrace the Investor mentality. The Borrower’s world might offer short-term thrills, but the Investor’s realm promises long-term satisfaction and more chances of success. Every trade may present an opportunity for immediate reward, but we must always remind ourselves that the most bountiful rewards are reserved for those willing to delay gratification.

By adopting the Investor mindset, trading becomes less of a rollercoaster ride and more of a strategic, rewarding pursuit. As you approach your next trading day, weigh your actions against the scale of time. Are you trading for immediate pleasure, or are you methodically building for a prosperous future? Your answer to this critical question could shape your trading journey and define your success.

 

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Cheers!

Imran Lakha
Options Insight