Call Options on the Chicago Cubs?

Editor’s note: With the Cubs in the World Series, this “classic” commentary from JR Crooks has become particularly timely. It’s a reminder of why process, not results, should drive your trading mentality. The process is fearless; if you build it, the results will come.

Seven or eight years ago, my father toured the country with a guy from the Philadelphia Stock Exchange to help promote the exchange’s currency options product.

That guy, Al, became a good family friend.

As a committed member of the PHLX, Al lived and breathed options.

We could be sitting around a pool having a beer, and he’d somehow bring a casual conversation back to options.

For instance, if Al were in front of the television last year when Joe Maddon talked about his goal of helping the Chicago Cubs win a World Series, he would have said something like, "I’m buying put options on that."

Translation: He’s betting that’ll never happen.

Of course, that’s not much of a bet if you know anything about the Chicago Cubs’ long history as lovable losers.

Now that the Cubs are playing for the National League Pennant, few know why the much-better bet was to buy call options on the Chicago Cubs this year.

It boils down to a certain discipline, a lot like what’s helped me become successful in the markets.

***

The Cubs had to win a Wild Card game against the Pittsburgh Pirates in order to face the St. Louis Cardinals in the Divisional Series.

They did.

Joe Maddon
Joe Maddon — Chicago Cubs Manager

After that victory, in a press conference, Manager Joe Maddon reminded fans how he’s helped make the Cubs successful during his first season in Chicago.

"I really believe the process is fearless. If you’re really focusing on outcome and just winning, then you can become fearful. But if you just focus on the process, the process is fearless. From day one we talked process more than anything."

Baseball fans know Maddon’s fearlessness helped him win the American League Pennant in just his third season with the Tampa Bay Rays. Wedged into the same division as the New York Yankees and Boston Red Sox, Maddon made Tampa Bay a perennial, albeit unlikely, contender.

After his Cubs won the series against the Cardinals last week, he spoke again of the reason behind his team’s success:

"I can’t emphasize this enough, that the process is fearless. If you want to go out a little bit wide-eyed and worry about outcomes, you’re not going to play as good as you can. You’re not."

Fearless.

***

Check out this graphical parody of trading psychology.

Click the image for a larger view.

It’s funny because it’s true — the rationalizations and recklessness of the average investor are each rooted in fear.

Investors fear both the loss of money and the loss of opportunity, sometimes simultaneously.

You don’t have to be Joe Maddon to realize you’re not going to invest well if you’re that fearful of investing.

Which brings me to a little-known concept called regret theory.

The theory, also known as regret aversion or anticipated regret, explains the fear of regretting possible outcomes.

For traders, the theory conveys an internal battle that requires making a decision that will always lead to one of multiple regrettable outcomes. Examples include taking profits too soon, giving back gains, missing a winning trade entirely or simply losing outright.

The outcomes of each decision, of course, are not equally regrettable in hindsight.

But that’s a lot of fear swirling around inside the head of an investor.

And that kind of fear is debilitating.

Reflexively, regret aversion influences the decision and in turn affects the outcome in a way that is likely to generate a less favorable, and always regrettable, outcome.

***

Now take a breath.

You can overcome regret aversion.

How?

Stop focusing on the outcome.

And start trusting the process.

As a trader, I cannot stress enough the importance of staying focused on process rather than outcome.

It took time, but over the years I developed a process that works. I developed a way to identify market patterns and use them for profit.

When I stick to the structure, discipline and direction inherent in my process, I trade well.

Sure, I may leave some profits on the table, like I did recently when I exited some call options on a gold mining company a little too soon. But I’m sure not regretting the better-than-100% profit this trade generated.

The only thing I ever regret is abandoning the process because I fear the outcome.

That is when I trade poorly.

***

Honestly, I’ve had a soft spot for the Cubs my whole life.

I caught a lot of Cubs’ games on WGN, alongside my father and grandfather.

Ryne Sandberg, the Cubs’ Hall of Fame second baseman, was always my favorite player growing up. Incidentally, his HOF induction speech showcases his respect for the process.

And for the historic Chicago Cubs franchise, it has been quite a process.

The last time the Cubs got as far as they have this season was in 2003 when they faced the Florida Marlins.

Now, I’m a Florida boy, and the Marlins have been my team since the late 1990s. So I was happy when they went on to defeat the Cubs at Wrigley Field in ’03, with the help of Steve Bartman.

If you don’t know Bartman, Google him.

And then consider: Maybe it’s time to sell those call options now and take profits while you’ve got ’em.

Otherwise, you’ll probably regret ever having thought the Cubs could actually win a World Series.

Do right,
JR Crooks

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“JR” specializes in trading commodities, currencies and options. He has spent nearly 10 years analyzing financial markets and writing about global economics. JR honed his trading techniques and global-macro worldview alongside his father, Jack Crooks, at Black Swan Capital. JR also …