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Options Trade Log: One Shirt Lost

Dan Leeson analyzes the results of his first 60 days of trading options and offers some great ideas not to duplicate if you want to be successful.

Options Trading Losses

I’ve previously written on my lessons learned in options trading. The following is a log of my experience trading options. While I have dabbled in stocks for a long time I had never felt like options was a beast I wanted to try and tame. Enter the end of July 2020, a lot of pandemic downtime had given me time to brush up on investing information and I had watched through a few videos and read some articles and felt like maybe it was time to try and ask my Robinhood app to let me trade options.  

So It Begins:

My first trade was purchasing a put option on GE. I had recently read a few articles about how GE’s Aviation division was hurting and I thought the company’s stock was going to go down. This was exciting, I have never had access to a trading platform that let me short sell a stock, and to me buying a put was the next best thing. I bought my option with the date set over a month out. My reasoning was I wanted to give it as much time to drop as possible. I watched as GE went down and sideways and down. When it started to move up I sold the option. In just under two weeks I had seen a 32% return!! I was ecstatic. I’ve never managed to purchase a stock that moved up so fast. Options are amazing! 

As I watched the value of my GE put rise, I bought two more puts, this time for Cinemark Theaters and Wells Fargo. I thought to myself, Cinemark is hurting with no customers! Their stock has been drifting downward, I may as well cash in on their despair. Why Wells Fargo? I thought, hey this eviction/foreclosure protection is probably hitting banks who aren’t getting mortgages. What great bets to make, I thought! Sold both for a 19% loss.

The Tides Begin to Turn:

I was starting to lose money, but I still wanted to keep going. Having a watch list of indexes where I keep gold and silver ETF’s on there, I had been watching Silver rise for awhile. Deciding to buy a call option on SLV I watched it rise with the price of silver over the next three days. My gain compared to the gain in the price of the SLV stock price was tenfold. After four days I sold for a 114% gain. Doubling my money in one week? I must be on the path to riches! Looking back, this trade feels like the rare perfect swing of an amateur golfer. The ball flies so far and on target, surely I can do it again!

My next seven options purchases all sold for a loss, I bought a call on AMRC because the stock was trending up. I bought calls and puts on IAU, a technique called a straddle and watched both lose value as the stock traded sideways. Noticing SLV going back up I bought more calls only to watch it fall back down in seeming defiant response to my purchase. On a roll I decided to buy a call for HL, a mining company, at the same time thinking if Silver moves up so will a company that mines it. I lost 60%,17%,8%,33%,70%,82%,87%.

The Crash.

I was distraught. Options prices move fast and are volatile. I learned an important lesson as well, that options are like a slowly deflating balloon. The time factor squeezes value out of the option with each passing day. If the stock price isn’t moving and bringing value into the option, it is losing value. That’s why the sideways price dropped the value of my straddle. 

I got a break toward the end of the month when I got a tip that HRL was about to have an earnings call and it looked like they might be in for a dip in price. I bought a put and waited. Sure enough, their price did drop and I sold early, wanting desperately to lock in some profit after a barrage of losses. A nice 33% gain in two days. This was the options trading everyone can enjoy – the ones that gain in value!

I found two companies with earnings calls the next week: H&R Block (HRB) and Macy’s (M). With the tax deadline extensions H&R Block was sure to beat earnings from the previous year. And Macy’s is a retailer and I was sure they were hurting with the lock-down situation. I read up on the state of both companies, not wanting to jump in and lose money like I had done so far. Turns out Macy’s was hurting but also positioned to scoop up competitors and corner the remaining retail market. Not certain which way M would swing I bought a straddle. For HRB I bought a call. Both companies earnings calls came and went and my portfolio value went with them. I lost money on the HRB call and both the call and put on M. 

A Ray of Hope Appears?

It was not all doom and gloom, however, as one strategy seemed to be paying off: buying calls on SPY, an S&P 500 ETF. I pulled up a history of the S&P and did some quick calculations and it seems over time, the S&P averages a rise of 1/10th of a percent. That’s an edge albeit a tiny one. I bought a call and sold it the next day for a 30% gain. Okay I thought, here’s a stock I can depend on. The index! It’s commonly discussed how the index beats a lot of money managers so why not follow it?

I poured what was left over from the money I had earmarked for playing options into calls on the SPY. The next day I sold out for an 82% gain. I had climbed out of the hole of disastrous losses. I again put the whole bank into buying more SPY calls. Ready to sit back and retire, the market quickly reminded me I’m a fool. Soon my calls shrank as the S&P pulled back a full month’s worth of gains. I tried to sell my call all along the way, but alas… no one was buying a call as the index was dropping. I couldn’t sell out to save my profits! And I wasn’t diversified either, all my money was sunk into these SPY calls. When the SPY descent started to level off I somehow managed to sell my calls for a whopping 97% loss. 

Now What id We Learn?

What did I learn along the way? That I love options like I love sports gambling. The thrill of one big win will keep me going through way more losses. That’s not investing though, it’s gambling. And gambling is fine by me, as long as I’m doing it clear eyed and not using money I depend upon it’s no different to me that dropping money on a weekend getaway. But it’s not investing. 

Options are always trying to drop in value and only a clear trend up or down will move a call or put. 

Sideways price movement is an option killer (unless the option is in the money and has intrinsic value)

There are no stop losses for options, I spent every five minutes checking the value to see if I needed to sell.

If the momentum is against the value of the option, no one will buy it and you can get stuck watching it die. This meant all my checking was for naught, as when it was time to sell out it was too late to sell out – no one was buying!

Volatility cuts both ways and it’s usually not on my side.

Stocks go up or down, the betting is binary. A call option and a put option on the same stock for the same strike price can both lose value at the same time. 

The feeling of doubling your money in three days is amazing, enough for me to ignore losing money for the following 14 days and keep buying options.

So What Happens Now?

There it is, my first steps down the road of options trading. For now, I’m sticking with stocks. I can use a stop loss to sell before I’ve lost too much value. Small incremental price movement upward that wouldn’t budge an option value is still value to the stockholder. Stock had it’s intrinsic value while ultimately an option is just leverage and can expire worthless. I doubt I’ll ever see a stock double in a few days like my SLV call did, but if it’s investing I’m after then stocks are the better choice for me when it comes to growing value in the long run.

If you want to hear about how we plan to lose money next week, check out the latest episode of Two Bulls in a China Shop.

Two Bulls in a China Shop


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