For those of you who don’t know, I’ve been managing my own investments and portfolio since late 2015 and I’ve gone through a large spectrum of “strategies”. Some of them have been fruitful, some of them, not so much…. I thought it’d be fun today to talk about one of the crazier things I did in early 2017. Zero day options trading.
Options are pretty complex, but the allure to degenerates like me is that you can make a lot of money very quickly. It’s not outside the realm of possibility to double your money within minutes or even seconds. I was also trading options at a time when the stock market was very volatile, so I could make 5 times or 10 times the money I put in on a single trade. However, I more frequently just lost all my money. That’s why the title of this post isn’t, “I’m a billionaire now and it was easy”.
Stock Options Primer
A little more information on how options work. Skip this if you just want to hear the story of how I was a dumbass and otherwise don’t care about stock market stuff. They basically magnify underlying stock moves 100x fold because they are contracts for 100 shares of a stock. Let’s say a stock’s market price is $10.00 and a Call option at strike $11.00 expiring this week costs $1.10 per contract. To buy the call, I’ll pay $1.10 x 100 (100 shares like I said earlier) for $110. Now, let’s say the stock goes to $11.00 in the next hour after I buy my Call option. This will likely mean that the option is now worth around $2.00 each because the stock went up $1.00. And now my original $110 turns into $200. Tada, free money right? Now, on the flip side. Let’s say that the stock goes down to $9.00 from $10.00 instead in the hour after I buy my Call. Well, in that case, the price of the option PLUMMETS. It’s probably worth 5 to 10 cents each. Which means I turned my $110 into $5. Long story short, options trading is extremely RISKY.
What makes options trading so hard (and stupid) is that you not only have to be right about how a stock will behave, you have to be right about the timing as well. Options have a time expiration to them, so if I have a contract that expires this week and the stock doesn’t do what I want it to in that timeframe, it’s almost guaranteed that I will lose money or even lose all of it. Going back to the previous example, if my Call option strike price is $11.00 and the stock is at $10.00 and my contract is expired, these options are worth $0. They would even be worth $0 if the stock price was at $10.99. There’s no partial credit here.
Okay back to me. One thing I’ve discovered about myself through investing is that I have no qualms about throwing all my money into something I know nothing about. I went back and found my first true day of balls to the wall options trading where I turned $7K into $22K. I can see why I was hooked immediately.
I thought to myself, “Wow, this is easy. I can make a living doing this.” The high this gives you is incredible. Not only did I just make $15K in a day, I only needed $7K to do it! What if I put in $25K?? These are the types of dreams you begin to have, and my descent into madness began, not to mention a gambling addiction. Sunshine and rainbows didn’t last long. Almost immediately after this, I started to lose money. Lots of money. When you think your next big win is just one trade away, you end up firing off trade after trade just hoping to catch something. I was constantly glued to my phone, looking at the graph go up and down, looking for the perfect moment to strike.
Pretending Everything is Fine
Here’s a day in my life on February 15th, 2017.
You may notice a few key differences from February 5th, just a week and a half ago from the first day I presented. First of all, I traded way more frequently trying to chase gains. If you do not succeed, try, try again. Next, my options on the 5th were expiring a week out whereas these options expired the next day. I was amplifying my risk even more to create larger upside. That’s called leveling up, boys and girls. Go big or go home. Now, look at the totals. I used $70K over the entire day and ended up losing $9K. I’m such a trooper, I even stuck through all those losses and ended up making some back at the end of the day.
These are the days that give you hope. “Hey, I lost a lot of money, but maybe I didn’t do everything wrong. I even started to pull things back towards the end.” I started to make rules. OK, if I lose this amount on a day, I’m just going to walk away. If I lose this amount in a trade, I cut it and move on. I still have a couple old gmail drafts where I tried to form my strategies. This is what I wrote word for word:
- eliminate biases, look at what the market is presenting
- be bold but also do not get attached to positions
- take profits, do not chase values, ie take what the market is presenting
- take profits systematically
- DO NOT DEVIATE, DON’T REVENGE TRADE, IF YOU’RE FEELING UNWELL WALK AWAY
- do not start positions when you’re not against a deviation, don’t touch it in no man’s land
- have a plan when you take a position
- be patient, let the candle come to you
- keep your positions standard, trading positions with more risk will make you emotional
You may be able to sense that I was mad at myself when I wrote this. If I match up the dates on this day, I lost $4k and didn’t have a single winning trade. The hardest part about this was the emotional LOWS I experienced. In fact, losing felt disproportionately worse than winning. If at one point, I was up $10K, and I made a trade that lost me $5K of those winnings, I would be devastated. Nevermind that I’m still up $5K on the day. Just the fact that I lost so much of what I could’ve walked away with stuck out in my mind. It made me want to keep trading until I got that $10K back and then some. Yup, that’s pretty much gambling.
So, I’m in this pretty dire situation. Some days I make money, but more often than not, I’m losing money day after day. It’s extremely painful but I want so badly to make it all back that I keep testing my luck. I’m hoping things start to click, finally but day after day, things don’t improve. I end up down $60K at the bottom on May 18th. I’m the green line and the S&P is the blue line. It’s a painful graph.
Even at this point, I don’t think about quitting. How can I? I need to make all that money back. I need to figure this out so that I can get back to even and then use those strategies to make a billion dollars and retire in the next year. It’ll make a great story one day! Is this what happens? Do I figure out something magical and trade my way to getting my $60K back? No, of course not. It’s gambling! There’s no figuring it out. I end up getting saved by sheer dumb luck.
This was one of my longer ranged positions. You can see that I bought them throughout the first half of the year with an expiration date around July. I was holding through an earnings call because I felt that this company kept beating estimates and the share price didn’t go anywhere. I thought that I would need some time to let the market figure it out. I ended up being right. This went from $5K to $72K. What a turn of events…. And there you go, it’s just easy. JK. I decided to call it quits after this. I was lucky enough to be bailed out and was extremely happy to be in a position to walkaway unscathed. This was obviously a big learning experience for me and I stuck with investing in general, just no more options.
If anyone is curious, my total gain from all my options trades after fees is: $231.86. My total fees were: $17,526.67. You’re welcome, Etrade. They gave me a Platinum account membership the next year. I ended up making 873 unique options trades and lost money on 515 of those trades, giving me a 41% win rate.
So there you have it, I hope that was entertaining. I’m sharing this as a warning to others who may find this path appealing. Don’t do it, it’s just not worth it. There are much better ways to make money.
I find it ironic that one of my least risky trades ended up panning out so well for me when I thought that I needed to resort to the riskiest trades to make money. Even considering this fiasco, I have done decently well investing over the years and I believe that everyone should be knowledgeable about trading and markets. I plan on writing a post on lessons learned soon if people are interested. See you guys next time.