Options Trading Can Be Lucrative If You Know How To Manage Risk
Here are some tips and tricks that I have learned trading options over the past five years.
Before we get to the article, I want to perform a little self-promotion. As some of you may know I was offered an exclusive contract with the “Callin” app to podcast 1-2x per week. This has been a great platform for me to podcast and has allowed me to go in-depth on subjects of interest including some of the topics I discuss in this newsletter. Yesterday, I hosted a great podcast where I discussed trading, the markets, and most importantly the impending invasion of Ukraine by Russia and how that may affect world markets. If you are interested I encourage you to listen to the podcast here. Further, the “Callin” app allows for a live question and answer session when you listen to my podcast. To participate, simply download the Callin app, create a quick profile and subscribe to my podcast! I podcast live every Thursday at 630pm MT/ 830pm EST and every Saturday at 11am MT/ 1pm EST. Tune in to the show and ask questions!
2022 has been a very busy year so far and a very lucrative year for my personal trading account. I started off 2022 with put options on ARKK, the infamous fund run by Cathie Wood filled with high flying tech names. Since Jan 1 of this year, ARKK is down -17%. Put options against ARKK have returned 200-300% over the first few weeks of January. Additionally, I was lucky enough to time some call options perfectly on SPY for the big run up from January 10-12. However, with trading, you will have good days and bad. Today was a bad trading day for me personally.
Here is a breakdown of my trading today. Early this morning I saw that futures were moving up rapidly into the cash open and decided to open a long position with call options on QQQ, the Nasdaq ETF. These options were expiring today at a $380 strike. The day started well with QQQ moving into the green, then immediately reversing. Once QQQ reached 377.64, and the Vix was steadily in the green I knew the call options were going to expire worthless.
I saw the Vix beginning to rise and knew the Russell 2000 has been performing poorly, so I quickly bought puts on the IWM ETF expiring today at the $209 strike price. The action was going well and then an immediate reversal came into IWM and my put options began to lose value. I quickly abandoned this trade as well. Today was not a profitable trading day, however, I further solidified my options trading strategy. The best way to learn and re-learn how to trade is to take a big loss.
Here are some of the biggest take-aways from options trading I have learned over the years:
Never purchase same day expiring options. When you purchase options that will be expiring that same day, you have the ability to make extremely outsized returns. However, you run the risk that the options will expire worthless. Additionally, you begin a count-down clock to the end of the trading day, where each minute can see theta decaying your options faster than your profits. For me personally, trading same-day options makes me much more reactionary to the normal, daily fluctuations of the market. I have found that I often buy/ sell more frequently and become much less profitable in my trades when I purchase same day expiring options. Always buy options at least one week or more from their expiration date.
If you have a trade go against you, STOP TRADING FOR THE DAY. Some of the worst trades I have made is I try and “make up” for a bad trade by quickly executing another trade, often in the opposite direction. For example, today I made a bullish bet on QQQ, saw the trade was going against me, quickly sold, then made a bearish bet and saw the market essentially stay flat to up from where I bought it. This was not a conscious, well-thought out trade. Rather, it was a reactionary trade that I likely would not have made if I did not have a losing trade previously. My personal philosophy is that I get one trade each day, if it does poorly and I have to close out my position that means I am done trading for that day.
Each trade should be a small portion of your trading account. As traders, we take every possible pre-caution against losses in our trading account. However, none of us can trade with 100% accuracy, meaning there will be losses. If you are aware of risk-management, those losses will likely be small, however, small losses over time add up. You need to look at stock trading as a cumulative build-up of profit and loss over time. The only way you can stay in the game and keep trading even after a serious of consistent losses is by performing each trade with a small percentage of your trading account. If you take a position with 50% of your trading account and you end up being wrong, you can be wiped out in two trades. Also, the more you are risking, the more likely you are to become reactionary to small market moves which will hurt your trading performance.
Trading should not be your main source of income. The theme of this article has been finding ways to minimize becoming emotionally reactive when trading. The best way to do this is to not have trading be your main source of income. Trading is stressful already, it becomes exponentially more stressful when a market, that you have zero control over, determines whether your bills get paid that month. This emotional perspective will do nothing but destroy your trading performance by creating a situation where you become emotionally reactive over every normal market move. There is no way to lose money faster than to trade in an emotionally reactive way.
Have a plan and stick to it. Bruce Lee said that he does not fear the man who knows one hundred kicks, rather he fears the man that knows one kick and has practiced it a hundred times. This specialization is especially true when it comes to trading. You need to specialize in what you trade. Jumping around to different options on different set-ups will lead you to disaster very quickly. You need to have a preferred index (mine is SPY) to trade and become an expert in how that index reacts to different setups.
I hope this tips and tricks that I have learned over the last few years are helpful. If you can avoid some of the mistakes I have made, you are well on your way to becoming a consistently profitable trader.
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**As Always, this article was not financial advice. Options trading involves financial risk. For financial advice, please consult with a licensed financial advisor for your particular financial situation.**