Hey everyone, I was reading a podcast related to options trading, and they had this idea where you would post your progress card every day. The idea sounded interesting enough that I am giving it a try by posting my first ever progress report. (Yes, you guessed it, I am one of the countless newbies that got interested in trading after the March crash). As many a trader, I got interested in trading after making a killer bet. In my case, this was Boeing. It was the last days of March, and my portfolio had gotten a hard beating. I was down 30% in two week, on a portfolio that had a long-term investment focus: a bunch of ETFs and a couple of Technology companies. I was particularly mad at an European ETF that had consistently outperformed since the day I bought it two years ago. That ETF was now drawing my portfolio down significantly. After a couple of days of deliberation, I thought "Fuck it, I am selling this". Which I did. On March 23. At the bottom of the market. At the same time, I knew that it was foolish to sell in a panic and give your money to the markets just like that: by buying high and selling low. I was a bit smarter than that. Therefore, the cash that I freed from that ETF, I invested in 3 companies that I thought could benefit from the crisis: SHOP, MSFT and MA. Further, I gave a look at airlines and I saw that Boeing was down 70% from its high. 70%! The stock had taken a beating to which I thought: "come on, it cannot be that bad". So I bought it, along with Air France-KLM which was also selling at a sensible discount. Fast forward 4 days later, the FED comes out with his bazooka, every one gets demential about the future of the economy and optimism sweeps Wall Street like Noah's flood. The stocks I chose rallied like a MF and I decided to sell them: - BA: up 66% - SHOP: 35% - MA: 27% - MSFT: 10% - KLM: 2% And then I got pause. I had managed to reduce my losses to 10%. In something like 4 days. 'What. The. Fuck?!', I thought. 'What the fuck?!'. This did not match any Investing conventional wisdom from the mouths of types like John Bogle, who were shouting my to hold my long-term investments. And believe me, I did the math; holding my previous portfolio wouldn't have delivered such a recovery. The veil had been removed from my eyes, my brothers. I had seen the light. And I had seen the potential profits and excitement that a trader could experience. And I got hooked. Just like my friend Marco got hooked on cocaine after a wild night out in his first year at university.* The following weeks, I got in and out of a couple of stocks that managed to net me some small profits: ZM, XOM, TKWY, GS. Nothing as wild as before, but consistently over 5% in these bullish markets. Then I read up on options and I thought: "I am definitely smart enough to trade those!". Big mistake. First option position lost 60% of its value until I sold it. Second option trade: I barely broke even. Third option position: 40% down. The market was now laughing back at me. I got annoyed and stopped trading. And I got more annoyed and promised myself that I would learn about options to know how to trade them. A few days later, I identified the three big mistakes I had made with my options trades. All of them suffered from these mistakes to different extents. You see, directionally I was correct: when I bet that the market would go down, it did go down in those three cases. BUT (1) I was trading in illiquid markets. The bid-ask spread was as wide as when Moses parted the Red Sea to let the Israelites flee the Egyptians. Something like 0.34bid vs 0.75ask. This meant that entering my positions already put me at a disadvantage. The option would have to appreciate >30% for me to just break even. The options in question were on the DJX, deep out of the money. (2) I was not taking into account theta, or time decay. I was buying options expiring in a few weeks, and selling them 5 days later. Ofc the price would depreciate quickly but I did not know how dangerous this time decay could be. (3) I bought when volatility (the VIX) was high. In particular with the last trade, I bought it at the VIX two-week peak. A couple of days later, the VIX goes down and of course my option depreciates. (Hello vega!) Which brings me to today. Over the past weeks, I have getting deeper and deeper into options. I have been reading books, watching videos and licking my wounds to get back to the deep blue sea of the markets. But I know something know: I am not that smart (yet!). Therefore, I have made it my goal to learn the in-and-outs of trading to be able to consistently make money with options. And it is a journey that will take some time, but I am up for the challenge. It is a bit scary, tho. It feels like there is so much information that I need to know before placing my next trade... But I need to start somewhere. Therefore, I am setting out here an initial small game plan that will teach me a lot more about trading in general, and then about options. I still need to learn so much about them. It seems that, on the one hand, trading requires things like understanding charting, market forces (e.g. sentiment), placing good orders, not losing money on the spread, managing portfolio risk well, and so on and so forth. On the other hand, trading options requires knowledge specific to this financial instruments. For example, price movements in light of its five fundamental market drivers (the 'greeks': veta, theta, delta, gamma, rho). Thereafter, one needs to think of option size, underlying of the option, liquidity of the option at different strike prices and so forth. Game plan for now is thus as follows: Place ten trades in a paper trading account. They are going to be simply long call/put options at strikes near the money. Each trade links back to ten underlyings that I have already chosen based on liquidity. These are QQQ, SPY, EEM, MSFT, BA, XOM, JPM, SHOP, USO and SLV. Read ten market reports, and annotate them. One for each underlying. I need to read this market reports and try to understand them from a 'greek' framework. How does time affect the options on the underlying? Long term or short term? (theta) What about volatility, is the price of the underlying calm or bitchy? (vega) What about interest rates? Do the options of the underlying react to this? (rho) What about deltas? How fast does the price change in light of new developments? (delta, gamma) After this, I want to build 4 options strategies, see which ones are the ones that provide the least risk and backtest them. I am not expecting to get good performance of this backtesting study. Heck, I do not even have a hypothesis that I want to test with this backtesting study. The only thing I want to do is write a Python script that will allow me to understand the functionality of the IBKR API. Wish me luck! *Just kidding, Marco does not exist. But point still stands: I got excited about trading.
The thing about options is that you have to do timing. And how fo you get there? By charting. How to read charts? Price action. And tadaa you know you are up to a big tile of work. If you want to have easy work start investing. Trading is transfering my money into your account, thats the game. In order to win you have to be better than me and the institutions. Your choice now. Investing or trading and putting time into it.
Sounds like you got bit by the option bug. On those early trades you cut losses instead of taking a full loss... that is better than most new option traders. Trying to learn as you trade can be tough. I like what you are writing and think you understand the advantages options can give you if you deploy the right strategies. There is tons of good content on the internet along with numerous book. I'm sure you have started doing this work and wish you had 48 hours every day to digest all the info. I have been trading options for 10 years and always love learning more as there are so many things you can do with them. Yes, understanding the greeks is important but don't fall down the rabbit hole like many options traders trying to dissect each letter like you are becoming fluent in greek. Learn Delta, Theta & Vega. Everything else will just make you overconfident that you know it all. It is more important to understand what direction you are leaning, use the correct strategy and manage risk. I'd strongly recommend using risk defined strategies at first. There are so many ways to deploy options which is why I love trading them so much. Good luck!
is it that you're already knowledgeable or smart in options- possibly teach ET members a thing or two? my take is that anyone, even a 'not as smart as a 5th grader' or a 'senior citizen' just starting out can be a successful option trader without all the BS of charts, technical analysis ... after all 'how difficult can it be' to be better than 51% win rate & better than 20% return on capital? basic fundamentals, self taught, youtube videos... and no, you don't need to go to seminar upon seminars, or pay someone to give you the BS on how to make mistakes.
Sounds like you definitely caught a bug. Don't rush it, and do not expect these huge move to continue forever. We're in some extraordinary times here with shit like, as you say, BA moving 70% down and then 66% up in a short time. That sort of thing has been happening all over the market on individual companies, and it is extreme. How hard can it be? Dude, use extreme caution when the market is acting extreme. The best-laid plans...Well...
Indeed, I am loving as well right now! And there is still so much content to go through. I am a bit on the honeymoon stage, still. haha Thanks for the advice! I was hoping that the plan would work out and the car would land well. But indeed, anything can blow up. I have trying to be a bit careful, though. The option positions were between 0.5%-2% of my portfolio which made the losses quite manageable. And, as you said, give it time. Rome wasn't built in a day, after all. Well, I would not consider myself that knowledgeable at all. I just started down this path. I do have some background regarding investing thanks to my studies (Econometrics) and self-learning which is making all the content a lot easier to digest. But I have a long long long way to go still. And I guess I can continue posting posts like this every once in a while. Maybe someone finds my findings interesting. And thanks, you just saved me a bunch of money because I was indeed thinking of going to one of those seminars. ._. But, yeah, I guess what you need is the intention first and then learning the fundamentals well.