I recently started trading options, and am looking forward to learning more, and sharing lessons as well. I have to admit to being pretty darn good at predicting the markets' movements. You'll just have to take my word for it, because I don't have the financial record to back that up. My biggest problem, I think, has been that I have found so many excellent buy(or sell) situations, that I wanted (and still want) a piece of them all. I began by funding an account with 15 thousand. I started out, I believe, to have bought myself into an over-diversified situation. And I found myself being thin on capitol if the trade didn't immediately go my way. Just to buy one deep ITM for 2-3 months out, could cost as much as 10% of my account worth. And I don't ever just want to buy one contract. Every time I would do that and the trade went the way it should, I would sell it at a modest 20-30% gain. I would do this for fear that it would turn back and re-test the support I bought in on. Sometimes it would, and I could be glad that I sold before the value dropped, but other times it would just continue to soar on higher and higher without me. I want to have many contracts to begin with, so that I can sell some when the 20-30% gain comes, but I can also hold on to some in case the stock goes skyward. So this is what I found my self doing. In order to stay diversified, I would buy calls or puts closer to At the money, or even Out of the money, and sometimes expiring in less than 30 days! I bought these because they are cheap and I can afford to own many. But those things would rot and fall apart almost the minute they got into my hands. My common sense is telling me to keep it simple stupid. Keep the number of stocks low, maybe even to one or two. Reason being that I can start out buying the safer deep ITMs that go out a few months. If my stock continues to drop after I buy it, then I would have as much capitol as possible to buy more as it drops. I realize this method is probably contrary to many in here, as most advice I've read is to stop loss almost immediately. I have made very good returns though using this method, and every time I lost using this method, was because I simply didn't have enough capitol to buy the amount needed to complete a terrific rebound. I am addicted to finding great investment opportunities. I am plagued by both inadequate funds and a lack of patience. I simply don't have the patience to buy stock in a way that brings good returns over months or years, when I know there is a way to bring astounding returns in a shorter period of time, if I just had more capitol, and/or if I can force myself stay out of all the great opportunities I am finding. Dear Abby, what should I do?
My suggestion is do NOT go on margin. Given your great track record, your fantastic investment expectations, and that you are not satisfied with 20 - 30% returns,.... I believe you will eventually lose most of your money, as soon as the market is no longer in bull mode. Being on margin will only speed up the rate and magnitude of your pending option losses. The market should always concern and worry you. Especially the option market. You are waaaaay too confident in your abilities to handle what may be coming. Focus more of your attention to learning how to "manage risk". Focus less on earning super fantastic % returns via the leverage of buying options.
Sounds to me like you're getting greedy, typical signs of that are lack of patience and not being happy with a 20-30% return (really, most hedgefunds would kill for that). Just keep doing what you're doing until it stops making you money. Then find something else. Be happy with what you got.
Hi Put- Thanks for the reply. Yeah, that's my worry, that I will destroy my account. When you speak of what may be coming, which will be devastating for me, I assume you either mean a large crash may be coming in the near future, a long trickle down, or the market may stay stagnant for a good long time to come? I have no doubt either of those things may happen, and I am bullish in nature. But how big of a crash are we talking about? Or How long can the market possibly remain stagnant until it moves again? I agree that if the market takes an 08-09 crash soon, I may be screwed, or at least my account may likely be. I'm definitely betting that won't happen, and I'm not sure how I could make money betting that it will, if I really don't think it will. But I do believe there is at least the possibility that I can remain bullish- even right through that kind of crash, and still be in the game enough to make money on the rebound, IF I make the changes I would like to, and invest in fewer stocks, instead of many. For instance let's take DirectTV for example (DTV); a company that has very good fundamentals year after year. They have little in the way of excess inventory to bog them down, and have generally outperformed their competitors. They are a top notch company in my humble view. They generally don't have a history of dropping more than 25% without offering a significant rebound. So, if I wait until it has dropped 12% before entering the market, I really only have 12% more to fall before a rebound comes. And the odds are really in my favor that if they are already down 12% when I enter its market, that it should immediately go up without falling much further. (I'm sure there are other choices than this stock, that have a history of even smaller crashes, if I dig around enough, but am just trying to make an example) When you say focus on risk management, do you have something else to offer along those lines? I am not all confident I will be able to handle what may be coming with the amount of funds I am using, with the methods I am using.. I don't plan on going on margin either. I thanks you for offering me solid advice. I imagine you are probably writing the contracts if you feel confident you will make returns either way the market goes. Would you mind disclosing what some of your methods are, and possibly the percentage of returns that you typically make per month/per year? And, Do these returns, meet or exceed your expectations? Are you constantly involved in many trades, or do you side line often? I invite anyone to answer these questions. What would you do, with a 15k account, if you were you and not me?
quote from your post: "If my stock continues to drop after I buy it, then I would have as much capitol as possible to buy more as it drops." continuing to buy more call options as the stock price continues to drop is called averaging down, and it will work in a bull market, but in a bear market--or sufficiently deep correction-- it can destroy an account
To answer a few of your questions,.... you don't need a market crash to destroy your account. A crash merely does it quicker. Being in the wrong sector at the wrong time can also do it. Being over leveraged can also do it, if you happen to be on excessive leverage at the wrong time. Not being picky about which individual stocks you are in can also do it, if you buy them too high. Especially the more volatile ones. It can be tempting to get into those type stocks, because their credit (premium) is so good. But if you are in them at the wrong time and the wrong price, they may not recover, if they take a hit due to missed earnings, or an overall market or sector drop. So don't chase premium. Wait for good companies that have a correction. And be picky about not just the stocks you select, but their prices, fundamental health, and tech support as well. As for my trades, you can find them all listed on the thread called "MY OPTION TRADES.... part 2". (Which you can currently find about 1/3 - 1/2 down the page.) There are trades I did several months ago, up until last week. Those ones from several months ago have already expired. If you are looking for suggestions, to consider, read my most recent ones over the past few weeks. They are NOT recommendations. I'm merely sharing them if others want to evaluate and consider them for themselves. As for my % returns,... Most of my trades earn between 13 - 15% annualized. A year or two ago I was earning 20 - 25%. That was when the VIX was higher, and thus premiums were higher. As the VIX has dropped over the years, I've dropped my % return goals along with the drop in VIX. I'd like to earn a higher % return than 13 - 15%, but I have to accept the market conditions I'm currently trading in, and adapt my strategy to changing market conditions. That is part of "managing risk", which i mentioned in an earlier post. My posted trades are naked puts. That may not be a strategy you are approved for. And if you are, you need to be aware of the risks of selling naked puts. If that is not something you are comfortable with, select a stategy(s) that you are comfortable with and knowledgeable about.
My advice: Your main goal should be to never get in to a situation where you are forced to leave the market and the trading My 2nd advice: Use the compounding formula for a "wise" planning, with conservative (realistic) parameters: If you make 10% in 2 weeks, then calculate how much this makes in a year: Cn = C0 * (1 + p / 100)^n where C0 = Starting AcctVal Cn = Final AcctVal n = # of periods p = performance in % per period Example: Cn = 15000 * (1 + 10 / 100)^(2 * 12) (ie. 12 months with each having 2 periods; just change the "12" for different # of months) gives Cn = $147746 In 2 years: Cn = $1455258 (that's about $1.5 millions) For more info: http://en.wikipedia.org/wiki/Compound_interest
<<< If you make 10% in 2 weeks, then calculate how much this makes in a year >>> Yes, annualize all % returns, so you have a standard "benchmark" to compare all trades being considered and/or initiated. HOWEVER...... annualizing super short trades like 1 - 2 weeks is somewhat meaningless. Those annualized % returns will always be super high. You'll think you are on track to triple your account value by year end, with those 1 - 2 week trades...... Only to end up with a comparatively puny % return at year end. Probably closer to 10% than 300%. But every trader should still have some type of similar benchmark "standard unit of measurement", to use on all trades. Just be aware that the annualized % returns, on those super short trades, are meaningless..... with respect to how your % return will actually look at year end.
Sounds like you are not afraid to hit the buy buttons. But are undercapitalized. You should get series 7 and find a prop firm to trade at. Sounds like you like to hedge and pair. You need more capital. I was in your boat until i started trading at prop firm and had much more buying power. No telling how good you might be. But didling around with online broker never going to find out. At a firm you could have the buying power to just buy the shares of the stock and not worry about the spreads and time erosion of the options.