What I Learned From A $150,000 Loss Trading Options (Part 1) One of my favorite aspects of running OptionSIZZLE, is the opportunity to meet and chat with individual investors from all over the world. It brings me great pride to be able to help people achieve their goals of wealth, freedom and options. Also, to be able to encourage them or pick them up when they’re down and doubtful. However, the road to getting here…wasn’t an easy one. I have a confession to make…. Like many of you out there, I didn’t start off making large profits as an options trader/investor. In fact, when I first started in the financial industry, I lost $2,000 on my very first option trade. Also, when I was in my mid 20s, I lost well over six figures, managing money during the financial crisis. Talk about a gut check right? I was fortunate enough to create an opportunity for myself at a young age to get my foot in the door in this business. However, to be honest….my experiences, early on, left me very jaded.
One of the situations that left a sour taste in my mouth was when I was a stockbroker, for a firm called Brewer Investment Group, my partner and I were cheated out of $120,000 in commissions that was owed to us. I struggled financially during this time, because I didn’t receive any of the money we earned. I remember I had to borrow $2,000 from my old boss just so I could pay rent. I found myself thinking that the stock brokerage business was just a glorified telemarketing job…and I was looking for a way out–something that could give me more control, with the ability to help investors out. That’s the part I enjoyed the most, but when I tried to spend more time assisting clients, I was told by my peers to just open accounts! The humbling part of all my experiences, is that it helped shape me and become the person that I am today. It helped create opportunities and put my in situations where I had to make decisions. With that said, I started gathering assets…while working on a trading desk in Chicago. My goal was to be a hybrid of sorts….an asset manager and trader. In addition, I’d be trying to attract new business and servicing existing clients. A one-man show so to speak. I envisioned being able to help people save on fee’s. Also, offer them an opportunity for a more strategic approach towards making investments. At the time, it sounded perfect…the ability to recommend and trade stocks that I believed in. You see, when I worked as a stockbroker, I’d question the reason why I had to “pitch” certain stocks…some of the picks didn’t make sense to me. However, my manager would continue to tell me to get on the phone and open new accounts. So when I got the opportunity to manage money and teach people the power of options….I jumped at the chance in 2007. In hindsight, this was probably one of the worst periods in history to start managing money. However, I learned a lot…and I’d like to share with you some of the mistakes I made in two of my biggest losing trades as a money manager. Now, I’m sharing these with you, not to brag about losing a lot of money. My goal is to be transparent with you about my journey.
This business is not easy and I’ve gotten my fair share of right hooks, from getting screwed out of the money I earned, having to battle a lawsuit from a competing site in the options space, to not living up to my expectations as a money manager. My road feels like it has been had more bumps than others, but I believe that is what has helped become who I am today. At the time, these losses took a big toll on my psyche. I took them very personal and to heart..I still do. For many years, I might even say, that I was embarrassed and haunted by those losses. I had a hard time forgiving myself. As I’ve grown older, I realized that it was the best I could have done at the time. I’ve forgiven myself and more importantly, I’ve learned for it. The opportunity and insight I can provide to you is just that much more valuable, because I’ve been there and I’ve felt it. My goal breaking down these two trades, is to help you avoid the same mistakes I made and teach you what I wish I knew back then…that I know now. Trade Number One:
MasterCard
One of the companies I really believed in during the financial crises was Mastercard. My opinion was as more and more people borrowed money…the more they’ll use their credit cards to make transactions. To create income for clients, I would sell naked puts in Mastercard. This was before weekly options were introduced. So the only options we had available were the monthlies. My logic was that this was a stock that I didn’t mind owning if the short puts expired in the money. These puts were very far Out-of-the-money or what I would call junky naked puts. For nearly a year, this was a trade that worked bringing income in every month until a simple rookie mistake snowballed into a large drawdown. The problem with selling way OTM put options is that they typically have a wider bid/ask spreads because they don’t trade too often. They don’t really have much premium so they don’t really decay until expiration, which forces you to hold them much longer or until expiration. Most of the time it’s not an issue and they expire worthless, but when something occurs like what I will share with you in a moment, it can become a quick drawdown. It was right before earnings on Mastercard going into the spring of 2010. At the time, the stock was trading around $250 per share. Recalling from memory, I believe I sold the $190 put
strike options. After the earnings release the stock had moved a little lower, but with the collapse of implied volatility, the put options were trading lower than what I sold them for– allowing me to buy them back. Like I mentioned above, I typically let them expire worthless. This is the number 1 mistake that causes investors losses that sell options. Instead of buying back the options and either putting the money to work into another trade or just take risk off the table and lock in profits, I choose to try to milk the trade for all the premium. The stock started to move lower over the next few days– I believe during one of those trading sessions in the afternoon, the stock dropped about 40 points…there was some chatter about legislating and capping interchange fee’s. With that quick drop, the puts became in the money and implied volatility increased as traders investors demanded put protection. My approach back then was to trade direction, and when following that approach I’d look to cut losses quickly and just move one. With the violent spike down in the stock price, I got scared and started to doubt my original thesis on why I liked the company. I provided clients with full transparency, allowing them to see every trade I placed in real time. However, I let a rookie mistake snowball into these issues and then didn’t let the probabilities and time play out, which lead me into a $30,000 loss. If I would have known what I know now, I would have been able to manage this trade successfully and work myself out of this loss– over the next few months I am going to share with you the mistakes that lead to this loss and how I would have either avoided them now or worked through them.
Blindly selling option premium without being aware of the volatility cycles. For
example, the options I sold deflated after earnings. However, I did not buy my puts back when implied volatility was low. What I learned: Look for opportunities in which option premiums are rich. More specifically, when premiums are elevated when investor feelings are experiencing fear or greed. Selling premium to collect income without having much else behind it, is not a good strategy.
Instead of staying in the Mastercard puts after the implied volatility collapsed…I should have been looking at other underlyings in which had unjustifiably higher implied volatility. If you’d like to learn more about how I trade volatility with options please read: How To Profit From Option Volatility How To Successfully Use Option Volatility To Trade Binary Events Adjusting To The Current Volatility
I didn’t have a solid back up plan. When the position started to move against me,
I’d cut my losses…in this case, buy back my short puts. However, when you’re in a short volatility position….adjustments need to be made. As the stock price was declining, the implied volatility in the puts were increasing in value. This is usually the worst time to get out. Ideally you’d like to sell volatility premiums when they’re elevated and buy when premiums are relatively low. I didn’t understand adjusting and this concept that well at the time. What I learned: If learned to make adjustments to my trading. For example, looking back on the trade….as my short puts got in-the-money, I should have been looking to sell some calls to make my position more neutral vs. being directionally bias. Rolling my near term options to a later date would have also been a good idea. The extra time would have allowed for the implied volatilities to come back in line.
I was sized too big relative to the account size. As the stock price was declining,
the margin was getting higher. This ultimately lead me to have little wiggle room…which then lead me to covering the short puts. What I learned: To trade smaller and be able to absorb any outlier event. I never want to be in a position where an outlier can occur and take me out of business. Losses are part of the game. However, trying to come back from a big loss can take a toll on someone emotionally.It’s better to keep losses manageable, and let the numbers play out. If you read Why Size Matters; Especially In Options Trading …you’ll learn what I am talking about. Overall, this trade would have still ended up being a loss. However, if I knew what I know now,
I would have been more confident with making adjustments and stopping the bleeding. Of course, this all comes from gaining experience…and experience is only gained from doing. A boxer learns by sparring and getting hit by punches. However, if they don’t like getting hit in the face…they’re in the wrong profession. The same could be said with trading, losses are part of the game. If you’re scared to take a loss…then don’t trade because it’s bound to happen. One final note, is that this experience taught me was not to value myself as a person, based on my PnL. The market is random, with that said, I’m working hard on continuing to learn and get better. After all, this is a marathon, not a sprint. In the second part of this article, I’ll share with you what I learned from my biggest loss ever ($120,000) In British Petroleum and what business mistakes I made as a money manager. This was one of the worst times in my life, not only was I going through a lawsuit, but the overall stress and being too transparent took a toll on my confidence. I appreciate the opportunity to open up and share some of my shortfalls. I believe it has really helped me grow, and hopefully be able to help you.. avoid some of the mistakes I’ve made. Losses have affected us all in one way or another, being a professional about this means going on with your business and understanding the risks and the reality of what could happen. Losing is an option and the reality Have you ever lost sleep because of a loss? How about one that you didn’t share with your spouse or loved ones because you were too embarrassed? If you’re tired of holding it in and would like to share with the group, feel free to write in the comments section below.
Hi I’m Josh, and I’m a finance guy. I cut my teeth in the markets on the Chicago Mercantile Exchange, so I saw firsthand how the “sausage was made” – and it usually wasn’t pretty. Because I quickly realized that fund managers only care about getting their fee's first even though 95% of them underperform the overall market. That didn’t sit right with me, so I left that world – And I discovered how to use my financial know-how to empower the little guy by using high-powered investing techniques – including
the only “real time” market indicator the pro’s use to spot future price direction. Now I’ve shared my message with over 129,000 people like you, and everyday investors have suddenly started making money in the market for the first time. Make sure you visit http://www.OptionSIZZLE to access your FREE report and eBook that will teach you how to trade options successfully to help you create wealth, freedom & options for you and your family.