Opened small position, 5 PUT – DIA 181 Aug 21, ’15 $3.60

I’m a little nervous with this one, if the Greece thing comes out with some miracle solution then the market will rally and I’ll probably have to cost base down.  If Greece drama drags out (which I think is likely) the market should pull back nicely.  I’ll have my finger on the sell button if we pull back over 150 in a day.

The last 6 months I’ve returned about 27k in profit, which is really outstanding from my perspective, I don’t think I’ve ever had more than 20k invested at any one time so the risk/reward feels pretty awesome. This will be the first time I’ve really broken down what moves generated the returns though.

Looking back (data I’m looking at is on the trades and trade history link, top right) I have used the following strategies:

Long and Short the DOW, time frame is from as far as 2 months to expiry and as short as 3 weeks to expiry. Used options on the DIA etf and options against DJX itself.

Long and Short oil, specifically WTI (not Brent), I used options against UCO which is a leveraged etf.

Long and Short the VIX, used options on VXX etf and options on the VIX itself. I’m curious if I made any money on this because its a tough one, I’ll probably write a blog post on this subject since its seems so promising but very difficult to execute against.

Long individual stocks: EMN, VMEM, TRIP, SALE, ODP, NMBL, MLHR, MKTO, LL, JNPR, GPS, COH, BCOR, BABA, GE

OK, so how did it break down:

DOW: $9700 profit across 21 transactions

Oil: $6900 profit across 19 transactions

Vix: $3600 profit across 12 transactions

Individual Stocks: $7400 profit across 30 transactions

Observations

Trading the Dow – so this trade ran about a medium level when it came to stress level, I pushed the limit a few times by not leaving enough time till expiry but only lost money on the trade 3 times vs profit 17 times. Strategy was pretty simple, I would enter a long after a big sell off of 200+ points or multiple down days as we got closer to 17800ish and would take profits as the market rallied back. I would reverse the strategy if I could time it right when we made new highs 18200 to 18300. I was pretty even between long and short plays on this. This market was (and is) very range bound so this worked and will likely continue to work for the next couple months or longer.

Trading Oil – so this trade was easy when oil hit the mid 40’s, I just called a long and made easy money. I tried a spread since I felt the ceiling on Oil was around 60 but I just didn’t have the patience to wait it out. The thing with spreads is you really have to wait till you get close to expiration before they really work. I’ve tried a couple shorts and called it correctly but the time premium on these options make big profits harder to get so I usually ended up with smaller returns then I would have normally held out for. I always got the call right but Oil is affected by the dollar as much as Oil fundamentals so unless it hits a big low again I’m not sure if I’ll continue to push my luck with it.

Trading VIX – this was a very painful and stressful trading experience. I tried several strategies and have to say I learned a lot about this. I feel I almost have a strategy that I can make work but need to run some scenarios on past data to verify. More on this in the future I think, but $3600 of profit and a learning experience, I’ll take it vs the alternative.

Trading individual stocks – this is really what I have to do more of. A couple of my buys were just plain stupid followed on by stubborn stupid and my favorite, greedy stupid. Let me translate. Stupid buys are uneducated buys. Stubborn stupid is cost based averaging down a stupid buy instead of just taking a loss and greedy stupid is watching something go up and then back down. I’m getting better at greedy stupid, I now exit positions 50% if they double at a minimum. I made over 7k but probably wasted at least 4k on dumb moves (ie buying options on a stock days before earnings because of some random article or comment on CNBC). If I can just reduce my dumb moves my basic strategy and execution is solid.

I started trading stocks about 8 years ago, moved into a mix of options and stocks about 4 years ago and now I only trade options.  I have never touched my 401k retirement money, its safe and sound in a well balanced portfolio.  All of the money I invest in options I can afford to lose and though it would make me upset it wouldn’t substantially set me back in life if I lost it all.  (and to be fair I started with so little that really everything I invest at this point is “the house’s” money)

I have had a variety of people ask me for advice on what to buy and how to trade options.  I’ve went through phases with long email chains of ideas bouncing around with friends but it was never really a good way to communicate.  So I figured I would start this blog, my friends can comment and share ideas on the site and I can have a page that tracks my trades.  I also hope that this can bring me a higher level of discipline since my rash decisions will now be open to the ridicule of my peers.

My friend Vinay first taught me the basics of options (thanks again!!), I read a book called Options for the Beginner and Beyond and then I jumped in.  I have tried a lot of different things, some worked, some didn’t.  But with every trade, win or lose, I have learned something to take into the next trade.

Disclaimer:

What I do is very aggressive, very very leveraged and is basically gambling.  If you can’t afford to lose 100% of what you bet on options don’t do it.  Note I said “bet”.  But this isn’t the lottery, Poker is gambling and yet you see the same group of millionaires at the final table over and over.  There is a stat that 90% of options trades expire worthless, but realize that most options are used to hedge risk and lock in profits on the positions they hold.  If they expire worthless it means for the most part they didn’t have to use the insurance that the options were in place for.  Options for the market are insurance, options for me are like vegas where you can play the part of the house or the sucker on the other side of the table.  I never trade ‘naked’ meaning I will never put a position in that can lose more than the investment and I don’t trade on margin.  You have to manage options trades basically everyday.  If you ‘get busy’ and don’t check for a week or two bad bad things can happen.  It only takes a couple minutes on a smartphone to track so there is really no excuse but if you want to go on vacation and fully unplug for a week than you need to exit your positions because stop loss strategies just don’t work well with options in my opinion.  So in summary, don’t do this unless you can lose everything you bet and not be bothered by it, don’t do it if you can’t check the market at least once a day and don’t do it if you can’t handle the emotional roller coaster.