How NOT to Trade Options
Grab a tissue, this is a tear jerker. This is the story of a man who thought he knew better than his mentors, a man who decided he could beat the market on his own terms, a man who lost 67% of his account value within 60 days, learning how not to trade options.
It all begain the fall of 2016. I had just learned about these mysterious things called “Calls” and “Puts” and that if you use them correctly, you can make tons of money on a regular basis. So I cashed out an old 401k and I signed up for optionsxpress.com. I needed to open an account with $5000.00 to get 100 free trades, I kid you not, the check I got in the mail from the 401k was $5000.15. It was serendipity! So I made a few iron condors and a few other trades and was slightly successful, but I knew all along that would change and be more difficult when I actually had to pay their $9.95 per trade + $0.70 per contract commissions. That meant a one lot of iron condors would cost $25.50 to open and close, do you know how hard it is to make money when you spend more on commissions than the max profit on a trade? It’s impossible, that’s how hard.
Anyways, the election came and I decided to go big or go home. I put on $5000 worth of call ratio backspreads. These make money if the stock goes down and make an uncapped amount if the stock goes up. But there also is a valley in-between the two profit zones where you have a max loss. I also put these on with 3 days to expiration. The day after the election my account was up $1000! I didn’t close anything. The next day it was up $600. I didn’t close anything, thinking things would go my way, that Friday, it didn’t and I ended down $1000, it wasn’t the full loss that I could have had, but it certainly stung to lose 20% of my account within the first couple weeks of trading.
Then I found another website where I had the privilege of paying a so called “expert” $199 each for two months. This particular trader in my opinion doesn’t know how to trade safely or make high probability trades. When I started to emulate their style, not necessarily following their trades, but trades like they would make, I lost money 7 of the next 8 weeks. This style centered around putting on a credit spread, call or put, at about 2-3 days before expiration and letting the stock expire out of the money, if it did, which it didn’t most of the time, it was full profits! But for me, this system didn’t work because first, you actually are providing risk premium, whereas when you put a trade on with 45-60 days, the additional time to expiration provides you with additional premium and a much larger profit zone.
I had 2 experiences that I wish I could take back. One I was helping my wife at her school, judging a history fair when GOOGL decided to fall apart, and by fall apart it was probably like a 2% change, which when you trade 45 days out is no big deal, but at 2 days out, it’s everything. I stared at my phone, watching as my account went down and down and finally hit my max loss. I was very upset and still was in charge of helping judge the history fair. Neither my mind nor my heart were there that day because I didn’t know what I was doing and I was on my way to losing $800. The next time was Black Friday morning when my family and I went to the mall. I was stuck in my phone, by 10:30 it was about to die, just like my account as PCLN was going down and taking my account with it. It just managed to stay outside my short strikes and I think I had a scratch on that trade, but the stress was absolutely awful and I couldn’t be there once again for my family.
My final straw was when I knew (or at least I thought I knew) exactly what the market was going to do when the Fed raised rates late in the fourth quarter of 2016. I once again put on a ton of call ratio backspreads. My basis was that when the election happened, the market exploded up, when Brexit happened, the market exploded up, so of course any news makes the market go up, right? No, you’re wrong kid. While the market did go up, the explosive nature never happened and it may have even come down slightly. Either way, my account that started at $5000.15, I added another $1000 along the way was worth $1683 by the time I finally threw in the towel.
The hardest part about all of it was knowing that this desire was planted in my heart for a reason and I totally, totally failed. Margin accounts need at least $2000 so I couldn’t even do anything in my account. I pulled all my funds and started saving and learning once again. I spent the next 5 months finding every available resource, saving more money and paper trading every day, working on the mechanics. By the time May came along, I was ready to do it again with $2213. Every month since then I have consistently returned 5-8% per month, not per year, per month! All while sleeping good at night, which I definitely wasn’t doing the day that my account went down $500 in a single day.
Thanks so much for taking a little bit of your time to read my story. I knew I was meant to be a trader, but I also didn’t know when I didn’t know and had to learn the hard way. Thankfully it was on a baby sized account, now it’s getting all grown up!!