After my oversight on how Vega effects options pricing, I was slightly disappointed but still up 68% in 3 months, I couldn't complain. Afterall, I was a noob.
This was nearing the end of July, and the market had just hit 14,000 and market sentiment was shifting as credit concerns surfaced. I decided it would be a good idea to attempt day trading, heck I could make up that $12,000 in a couple days trading, or so I thought. I knew Apple was destined to go higher. I watched Apple in the morning and it looked like it was going to move up some more and possibly rally again past it's old high it made the day after earnings. It broke its old high in the morning and I decided to buy, my full position during the most volatile time in the market. Right after i bought, it moved higher I had 150 contracts I believe and I was up 3,000 in short order but it appeared to be stalling, I was somewhat worried but figured it was just pausing on its way up. It then promptly reversed and started a downfall as people seemed to be taking profits in the stock. By the end of the day , I was down I think another 12,000 instead of up like I wanted to be. So now, I was only up slightly over 30%. If I was smart I would have cut my losses and exited and waited to see what happened.
I wasn't smart then.
I figured it would reverse, however I chose possibly the worst time because the decent in the major indicies had now begun and people were fleeing equities for safer returns in bonds. By the end of the week I had lost all profit plus another 30%. I had managed to lose $50,000, someone's very good salary for a year, in a week.
Why did this happen? First, I broke all three of my rules. I traded in the morning, I bought all at once and I didn't cut my loss after the 1st day when I was clearly wrong and proceeded to hope it would come back. Had I even just follwed one rule of not buying all at once I could have likely managed to at least stay above even after that week.
So there I was, feeling so confident and flush with cash the week before, now I was defeated and much poorer in my account.
It was time for change....
Saturday, October 13, 2007
Friday, October 12, 2007
The Downfall of Success
After I saw my account increase by a much larger amount and at a much faster pace than I could really hope for trading stocks, I was hooked on options. Also, keep in mind that I am only 23, I am allowed to be more risky with my assets at this age than someone who is say 40. However, like I said I still feel like you can be very conservative with options and they can be a good replacement for stock if you stay diversified and know what you are doing.
So for the next month or so I traded Apple options, basically looking at what the sentiment was and how reasonable I thought a move was and I would choose an option out of the money at my price target hoping it would go over it. I had no real education on Technical analysis at this point, I would just go off of what I "felt" the stock would do. Obviously having a feeling about a stock is likely based on logic that is based on previous movement but like I said I didn't really think about that at the time. As I went on I started to notice that the stock price would get "pinned" at a fairly round number at options expiration so I would take this into account when picking a price target.
So, I was only trading Apple options, I then decided diversification would be good(which it is) and bought some other option positions in stocks I liked. All of these positions went against me and my only position making money at the time was Apple. This basically made me think "well why go away from a good thing if it is working".
Since it was so logical to me Apple was the easy money and going higher with all the pending news it would have I focused all my efforts on one stock and started to increase my position size.
This unfortunately worked. I basically got into the market at a very good time (remember the May-July run?) which was great for my account but not good for my skills. My account was more or less increasing steadily although fairly volatile being tied into one stock.
As I went along I had adapted a few rules:
1. Cut loser short
2. Don't trade in the first hour
3. Incrementally buy a position so you can cost average down.
While I was on vacation, I finally saw my account cross the 100% return mark. I had hit $75,000 in my account within 3 months of beginning my options trading career. Great! Right? No.
How did I get there? Basically stupidity that worked out for a short while. I was trading huge positions once I had gotten over 50,000 I would regularly be buying 100 contracts since that then became the new standard(up from my 10 just a couple months prior). I would put on a 15,000 dollar position and see it double. I had the timing and price movement mostly down but I was going about it the wrong way. Way too risky.
So, the wake up call came shortly after Apple's earnings in July. I went all in, literally my whole account into Jan 08 250 calls since they were 1.25 I could get almost 600. That means for every 10 cents the call increased I would make 6,000 dollars.
This was actually fairly logical in setup, I looked at what other comparable tech stocks that beat had done after earnings, most had gapped up. RIMM for example gapped up 50 dollars. I had actually done my own calculations and come up with my own estimate on apple, something like .95 cents EPS, which wasn't far off. I figured if they got close to that the stock would gap up 10-15 dollars. Well I couldn't have been more right, they got .92 EPS, after hours the stock gapped up 14 dollars. At this point I am thinking "ka-ching". I had basically thought I doubled my account on that move, given my Delta was like .10 and gamma was .003. So a rough guess was I gained about a 1.50 in my option value minus some small time decay.
The next day the market opens the price had held pretty much, it was still up +13 from the previous day so I was going to sell out right away and book my profit. Market opens, my option price doesn't move, in fact it has lost 10 cents in value. I am freaking out, going WTF happened. I end up getting out with a 20 cent loss so I lost 12k.
This was odd to me, I was actually lucky I was so right in retrospect because otherwise I would have lost way more at that point. What had happened and what I didn't know about the time was Implied Volatility decay. This basically happens after every earnings announcement, however I didnt see it happen to my last options over earnings because I was at the money and they became in the money and gained intrinsic value, these were all time value and volatility.
So this was partially bad luck and partially a rookie mistake because I didn't know about Vega, which I should have. However, when you lose 12k when you thought you were going to make 100k? You bet your ass I found out why.
The lesson learned here? Trade out of the money(OTM) options going into earnings as volatility will generally increase and increase your option value, then if you do not become In the money(ITM) then trade up to ITM. However, this is only if you are fairly certain of the outcome and its higher probability. I would now take profits and hold less contracts over earnings since you really don't know how the stock will react.
So we covered my earnings blunder, how did I give up my 100% gain and then more in the span of a week? I'll tell you.
So for the next month or so I traded Apple options, basically looking at what the sentiment was and how reasonable I thought a move was and I would choose an option out of the money at my price target hoping it would go over it. I had no real education on Technical analysis at this point, I would just go off of what I "felt" the stock would do. Obviously having a feeling about a stock is likely based on logic that is based on previous movement but like I said I didn't really think about that at the time. As I went on I started to notice that the stock price would get "pinned" at a fairly round number at options expiration so I would take this into account when picking a price target.
So, I was only trading Apple options, I then decided diversification would be good(which it is) and bought some other option positions in stocks I liked. All of these positions went against me and my only position making money at the time was Apple. This basically made me think "well why go away from a good thing if it is working".
Since it was so logical to me Apple was the easy money and going higher with all the pending news it would have I focused all my efforts on one stock and started to increase my position size.
This unfortunately worked. I basically got into the market at a very good time (remember the May-July run?) which was great for my account but not good for my skills. My account was more or less increasing steadily although fairly volatile being tied into one stock.
As I went along I had adapted a few rules:
1. Cut loser short
2. Don't trade in the first hour
3. Incrementally buy a position so you can cost average down.
While I was on vacation, I finally saw my account cross the 100% return mark. I had hit $75,000 in my account within 3 months of beginning my options trading career. Great! Right? No.
How did I get there? Basically stupidity that worked out for a short while. I was trading huge positions once I had gotten over 50,000 I would regularly be buying 100 contracts since that then became the new standard(up from my 10 just a couple months prior). I would put on a 15,000 dollar position and see it double. I had the timing and price movement mostly down but I was going about it the wrong way. Way too risky.
So, the wake up call came shortly after Apple's earnings in July. I went all in, literally my whole account into Jan 08 250 calls since they were 1.25 I could get almost 600. That means for every 10 cents the call increased I would make 6,000 dollars.
This was actually fairly logical in setup, I looked at what other comparable tech stocks that beat had done after earnings, most had gapped up. RIMM for example gapped up 50 dollars. I had actually done my own calculations and come up with my own estimate on apple, something like .95 cents EPS, which wasn't far off. I figured if they got close to that the stock would gap up 10-15 dollars. Well I couldn't have been more right, they got .92 EPS, after hours the stock gapped up 14 dollars. At this point I am thinking "ka-ching". I had basically thought I doubled my account on that move, given my Delta was like .10 and gamma was .003. So a rough guess was I gained about a 1.50 in my option value minus some small time decay.
The next day the market opens the price had held pretty much, it was still up +13 from the previous day so I was going to sell out right away and book my profit. Market opens, my option price doesn't move, in fact it has lost 10 cents in value. I am freaking out, going WTF happened. I end up getting out with a 20 cent loss so I lost 12k.
This was odd to me, I was actually lucky I was so right in retrospect because otherwise I would have lost way more at that point. What had happened and what I didn't know about the time was Implied Volatility decay. This basically happens after every earnings announcement, however I didnt see it happen to my last options over earnings because I was at the money and they became in the money and gained intrinsic value, these were all time value and volatility.
So this was partially bad luck and partially a rookie mistake because I didn't know about Vega, which I should have. However, when you lose 12k when you thought you were going to make 100k? You bet your ass I found out why.
The lesson learned here? Trade out of the money(OTM) options going into earnings as volatility will generally increase and increase your option value, then if you do not become In the money(ITM) then trade up to ITM. However, this is only if you are fairly certain of the outcome and its higher probability. I would now take profits and hold less contracts over earnings since you really don't know how the stock will react.
So we covered my earnings blunder, how did I give up my 100% gain and then more in the span of a week? I'll tell you.
The Epiphany
After holding my stocks for a while and being fairly content with my choices to be up 8% in a month I started to read into options a bit more. Most things I read were actually very confusing, they made it seem like you had to hold options until expiration and if you didn't hit your strike price they were worthless. This makes me understand why more people do not trade them. However, I went to my grandma to ask her if you could in fact trade them like stocks, she said sure there is no reason to hold them, in fact you shouldn't hold them into expiration unless you have the money.
After clarifying that and reading a book called "All About: Options" I felt I had enough info to get my feet wet. I had been watching Apple for a bit and liked the company and figured they would do well on their upcoming earnings and had many more catalysts to come during the year. I decided to buy some options right before earnings(we'll get to why this screwed me later). I bought 2 contracts of the 95 June calls, it would have been 10 but the price ran up on the stock in the 15 mins I was finalizing what I was going to do. Apple reported and blew estimates away and the stock jumped 7 dollars the next day. I had instantly doubled my money and made 1,200 into 2,400. Obviously I liked earnings 1,200 in a day instead of a month's time. I at that point also had enough knowledge to know stocks will then usually pull back, so I sold my calls on the open and bought puts, this time the 10 contracts I wanted originally, and actually made another 2,900. WOW, I was excited and proud of myself for predicting how the stock would move. I was off to a good start, which we will find out later why this is not necessarily a good thing.
What most people do not understand about options is they can be as risky or as conservative as you want, I was fairly conservative since I was still new. Leverage can be your friend if you know how to use it properly. Options give you limited risk with unlimited reward which again, can be very useful if you know what to do. Options do have more risk though as they can technically go to zero value and the leverage gives you bigger gains or losses in shorter amounts of time. I'll touch more on what I did in the next post and how my initial success actually set me back and how trading rules must always be followed. Stay tuned....
After clarifying that and reading a book called "All About: Options" I felt I had enough info to get my feet wet. I had been watching Apple for a bit and liked the company and figured they would do well on their upcoming earnings and had many more catalysts to come during the year. I decided to buy some options right before earnings(we'll get to why this screwed me later). I bought 2 contracts of the 95 June calls, it would have been 10 but the price ran up on the stock in the 15 mins I was finalizing what I was going to do. Apple reported and blew estimates away and the stock jumped 7 dollars the next day. I had instantly doubled my money and made 1,200 into 2,400. Obviously I liked earnings 1,200 in a day instead of a month's time. I at that point also had enough knowledge to know stocks will then usually pull back, so I sold my calls on the open and bought puts, this time the 10 contracts I wanted originally, and actually made another 2,900. WOW, I was excited and proud of myself for predicting how the stock would move. I was off to a good start, which we will find out later why this is not necessarily a good thing.
What most people do not understand about options is they can be as risky or as conservative as you want, I was fairly conservative since I was still new. Leverage can be your friend if you know how to use it properly. Options give you limited risk with unlimited reward which again, can be very useful if you know what to do. Options do have more risk though as they can technically go to zero value and the leverage gives you bigger gains or losses in shorter amounts of time. I'll touch more on what I did in the next post and how my initial success actually set me back and how trading rules must always be followed. Stay tuned....
Moving Forward with a Purpose
This is the start of a new chapter in my life and what better way to celebrate it than blogging about it right?
The purpose of this blog will be to document trades I make, why I make them and how they turned out. I will then reflect on these trades and see what can be learned and applied to the next trade to help myself improve. I hope my thoughts and reflections will also eventually help other people learn to trade better by saving them some of the same mistakes I have already made.
First I will give a background on where I have come from. My grandparents were nice enough to start a stock portfolio for me and my siblings so that it will someday help us financially later on in life. My Grandma had the most knowledge and experience in the stock market so she basically chose the stocks and oversaw our accounts(and of course paid a broker to make the trades and do nothing else). I think we have had the accounts since 2000. In 2004 I became somewhat interested in the stock market and was always curious about it seeing my Grandma watch it constantly while we were on vacation. She was eager to teach me and I wanted to learn and open my own account.
So I opened a TDAmeritrade account(at that point just Ameritrade) and I put some money in along with some money she gave me. Overall, I think there was about 5,000 in the account, not too bad for a college student(or any account for that matter). I was currently studying in Hawaii at the time, and only had class 2 days a week So I had time to watch the market given that it opened at 4am there and was done by 12pm.
Basically what I proceeded to do was nothing more than gamble and make fairly uneducated speculations on stocks hoping to make a profit. As you can imagine this did not work too well, my best day I think was a 500 dollar profit on ticker symbol MAMA which had a short revival of the dot com days. My one good call managed to make me 500 and my grandma about 30,000, which she then lost a short time later making similar speculation.
The result was I lost 2,700 of that 5,000 trading for only a short time. What was even worse was at the time I didn't really think to question anything my Grandma was doing and basically thought all the stock market was just a gamble. Afterall, she had at least 20 years experience over me so I assumed she would have it fairly figured out.
So that turned me back off of it for a while. I continued focusing on my other passion of cars, which is a terrible financial investment but was a great educational one in my opinion.
Around March of 2007 I took an interest again, I had seen how I was fairly lucky to be in a situation where I would come out of college with little to no debt and wanted to be smarter with my money and have my money generate more money. I looked at my account my Grandma had for me and did some calculations and realized I had earned less than a 2% return per year, most of that came from Best Buy stock. I knew I could get an even better return in a CD and figured there had to be something being done incorrectly.
I have always considered myself a Do-it-yourself type of person, I feel I am smart enough to do anything and if someone else can make decent returns in the stock market, I am perfectly capable as well. So, I decided to start reading many books, I also began watching Mad Money with Jim Cramer on CNBC, which I do have to give a lot of credit for getting me excited about making money and learning about investing. So after reading a few books I felt I had a good idea on how to value and pick stocks in my own portfolio so I took over my account.
At this point when I took it over I had about 32,000 in stocks. After a fairly successful trip to Vegas I put in another 4,500. Once I sold to re-allocate my balance was $37,403. I am giving actual dollars because I think it is useful to see real money at stake and to give people an idea of what type of account I am working with for their own references.
So I sold out of everything and went about picking stocks based on fundamentals, more of the Warren Buffet style and what I had learned from Jim Cramer's books as well. This was in mid April at this point. I chose a few stocks based on what I thought were good fundamentals and were diversified. I chose ACH, FCX, HERO, RIG, TCK and a few other tech stocks(funny thing is if I had held those till now I would have an average of 50% return for the year, but I'll get to that later).
The purpose of this blog will be to document trades I make, why I make them and how they turned out. I will then reflect on these trades and see what can be learned and applied to the next trade to help myself improve. I hope my thoughts and reflections will also eventually help other people learn to trade better by saving them some of the same mistakes I have already made.
First I will give a background on where I have come from. My grandparents were nice enough to start a stock portfolio for me and my siblings so that it will someday help us financially later on in life. My Grandma had the most knowledge and experience in the stock market so she basically chose the stocks and oversaw our accounts(and of course paid a broker to make the trades and do nothing else). I think we have had the accounts since 2000. In 2004 I became somewhat interested in the stock market and was always curious about it seeing my Grandma watch it constantly while we were on vacation. She was eager to teach me and I wanted to learn and open my own account.
So I opened a TDAmeritrade account(at that point just Ameritrade) and I put some money in along with some money she gave me. Overall, I think there was about 5,000 in the account, not too bad for a college student(or any account for that matter). I was currently studying in Hawaii at the time, and only had class 2 days a week So I had time to watch the market given that it opened at 4am there and was done by 12pm.
Basically what I proceeded to do was nothing more than gamble and make fairly uneducated speculations on stocks hoping to make a profit. As you can imagine this did not work too well, my best day I think was a 500 dollar profit on ticker symbol MAMA which had a short revival of the dot com days. My one good call managed to make me 500 and my grandma about 30,000, which she then lost a short time later making similar speculation.
The result was I lost 2,700 of that 5,000 trading for only a short time. What was even worse was at the time I didn't really think to question anything my Grandma was doing and basically thought all the stock market was just a gamble. Afterall, she had at least 20 years experience over me so I assumed she would have it fairly figured out.
So that turned me back off of it for a while. I continued focusing on my other passion of cars, which is a terrible financial investment but was a great educational one in my opinion.
Around March of 2007 I took an interest again, I had seen how I was fairly lucky to be in a situation where I would come out of college with little to no debt and wanted to be smarter with my money and have my money generate more money. I looked at my account my Grandma had for me and did some calculations and realized I had earned less than a 2% return per year, most of that came from Best Buy stock. I knew I could get an even better return in a CD and figured there had to be something being done incorrectly.
I have always considered myself a Do-it-yourself type of person, I feel I am smart enough to do anything and if someone else can make decent returns in the stock market, I am perfectly capable as well. So, I decided to start reading many books, I also began watching Mad Money with Jim Cramer on CNBC, which I do have to give a lot of credit for getting me excited about making money and learning about investing. So after reading a few books I felt I had a good idea on how to value and pick stocks in my own portfolio so I took over my account.
At this point when I took it over I had about 32,000 in stocks. After a fairly successful trip to Vegas I put in another 4,500. Once I sold to re-allocate my balance was $37,403. I am giving actual dollars because I think it is useful to see real money at stake and to give people an idea of what type of account I am working with for their own references.
So I sold out of everything and went about picking stocks based on fundamentals, more of the Warren Buffet style and what I had learned from Jim Cramer's books as well. This was in mid April at this point. I chose a few stocks based on what I thought were good fundamentals and were diversified. I chose ACH, FCX, HERO, RIG, TCK and a few other tech stocks(funny thing is if I had held those till now I would have an average of 50% return for the year, but I'll get to that later).
Subscribe to:
Posts (Atom)
Posts
