Ep37 - Prospect

Wealth Building With Options

Summary:
Dan Passarelli sits down with coach John Kmiecik to unpack why smart traders still struggle with losses, risk, and variance—and how to reframe decisions using Prospect Theory. They cover loss aversion, the disposition effect, myopic loss aversion, “house money” mental accounting, and practical coaching tactics (like multiple exits and portfolio-level thinking) to build discipline. Dan also corrects a note from last week: neuroscientist John Coates earned his degrees at the University of Cambridge.

Key Takeaways

• Prospect Theory in practice: Most traders feel losses about twice as strongly as equivalent gains, which skews decisions if left unmanaged.
• Loss aversion shows up everywhere: Hesitating to take small losses, rolling losers “to get back to even,” and cutting winners too early.
• Myopic loss aversion: Staring at a single position and checking P&L too often leads to reactive choices; think in portfolios, not trades.
• Multiple-exit approach: Taking a small, early profit can make it psychologically easier to hold for the primary target.
• Variance desensitization: You must get comfortable with swings; focus on net outcomes over a series of trades, not tick-by-tick moves.
• Mental accounting pitfalls: “Playing with house money” is a trap—capital is capital, regardless of where it came from.
• Framing matters: “Selling a put” can be reframed as “agreeing to buy shares at a discount with volatility rebates,” then managed by plan.
• Preparedness beats FOMO: If you miss a setup, another will come. Have every “twist and turn” covered in your plan before the trade.
  

Practical Tools Mentioned

• Multiple-exit method: Scale out (e.g., take a small “comfort” profit, then hold for the main target).
• Portfolio-level targets: Judge results over a basket of trades, not a single outcome.
• Account hygiene: Close the P&L window when it provokes impulsive behavior.
• Pre-mortems: Visualize assignment, gaps, and management steps before you enter.
  

Links & Resources

• Become a paid subscriber for video extras and trade ideas: wealthbuildingpodcast.com
• Learn more about Dan Passarelli and Market Taker Mentoring: markettaker.com

About the Guest

John Kmiecik is a senior coach at Market Taker Mentoring. He works 1-on-1 with traders on strategy selection, risk management, and the psychology required to execute consistently.

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Disclosure:

Options involve risk and are not suitable for all investors. Prior to buying or selling an option, investors must read Characteristics and Risks of Standardized Options (ODD) which can be found at https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document

Don’t trade with money you are not prepared to lose. Anything discussed on this show is intended to be generalized information and not intended to be a recommendation to buy or sell any security. The host and guests are not familiar with listeners’ specific situations. For trading information relevant to your specific needs, speak with a licensed broker or advisor.

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