My experience with Options

Investment Analysis Clubs Saul’s Investing Discussions
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Hi Everybody,
Even though options are OT for this board, Saul mentioned to me that I should post my experience here.
This should serve as a reminder of why options are OT on this board.
Around 2009-2010 I started playing with buying some AAPL calls. I was following a newsletter by a very convincing writer named Jason Schwarz. The first year or two I would make a little and lose a little from time to time, yet as I watched AAPL stock over those first couple of years I began to believe that I could see a pattern (as did Jason Schwarz and other writers such as Andy Zaky)

http://fortune.com/2013/03/04/the-rise-and-fall-of-andy-zaky…

So in 2012 I got serious about trading AAPL calls (buying at the bottom of the range - usually holding for the period up to and sometimes partially through earnings etc. - mitigating risk by selling at the tops of the current trading range.)

My story, however painful, could have been much worse (I will post some stories I have heard from Financial Industry insiders. While substantial to me, the amount of money could have been much larger.)

My Roth account then had gone from about 30k to maybe 12k through bad stock picking (I had not found Saul or the board yet). I started trading options seriously (using my whole account for that purpose) in the spring. At first I tripled my account in a few months but then I held through a swoon (probably around May, June) and was down to about 8k. Then after sticking it out through that downturn the account went up something like %700 in a couple of months (to 55k).

From that success I became so convinced that I knew what I was doing. My friends that I worked with said I was so arrogant about trading that I was unbearable to be around when that subject came up. Lol
So now, that I was doing so well instead of putting some money aside into safer investments, I decided to start trading my wife’s Roth with AAPL calls as well.
I think her account went up initially for a weeks as well. (from maybe 20k - 30k).
Then Apple stock began a long descent which lasted well over 6 months.
At the top I think the 2 accounts were worth close to $90k. I kept the faith because I had come back from swoons in AAPL stock before. Trading with Jason Schwarz we always kept some cash available but the problem is that if you keep losing over and over, it eventually becomes death by 1000 cuts.

The 2 accounts lost more than 70% of their value in 4 weeks and eventually after 4 more months each account had about $10 left (no I did not miss a zero). 2 accounts completely wiped out to basically nothing.

I even lost an additional 12k in another account, a regular trading account because I was so sure AAPL would come back (as an aside, luckily that same year in that acount I made about $12,000 from buying 100 shares of TSLA at 30 something dollars and selling them at $150 within months)

At the time, before switching to options, I had some NFLX stock in my wife’s account bought near the bottom of the Qwikster debacle (for those that remember). I also had some AAPL stock which I sold to buy options. NFLX stock is up a staggering amount since then and AAPL at least double from the top put in back then, not including dividends.

The reason I believe options are dangerous for readers of this board is because I believe anyone serious on this board is seeking alpha (significant alpha with reasonable expectations in my case). I worry about anyone new using options, I understand there are conservative ways to use options like selling covered calls etc, none of which interests me.

My friend in the financial business all his life (who lost 50k in options in a heartbeat and begged me to never get into them, who also told me to buy FB when it was like $16 agh!)
Anyway, before I finish this post I leave leave you with another story from my friend as food for thought.
He was working at one of these brokerage houses in 90s during the dot com bubble.
There was one account that everyone in the office would all look at every day because it was astonishing the money it was making.
A doctor (had to be a smart guy right? a Doctor!) Saul is / was a doctor if I remember correctly.
Rolled over his 401k worth $500,000 to this brokerage and started buying option calls on all the hot tech names: AMZN, and whatever else was soaring.
In 2 years the account was worth around $83,000,000!!! (Hard to believe right!? - True story)
At the end of the crash in 2000 he had $50,000 left.
I told this story to a guy who runs a gold hedge fund that gave us a tour of the CME.
He laughed and said he was impressed that the guy had $50,000 left in his account.
Thanks for listening to my story everybody,
If it helps even 1 person I will be happy.
Have a great day everybody!

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MusiCali,

Although I am sorry you had to suffer such losses, I appreciate you sharing your story for our benefit.

I don’t know if it completely scares me from options however (even somewhat riskier ones). I think the moral is to play in the sandbox, not in your 401k, IRA, or other tax advantaged accounts. Personally, I figure I could play the lottery, which I have effectively no chance of winning, or play options, which I have little chance of winning. Little is better than none, and it is always fun to dream. Hence I have a small account in which to “play.” The key for me is, options are entertainment, and I treat them as such. I wouldn’t use my retirement accounts to purchase/sell options any sooner than I would use those funds to purchase a pool table.

If I ever make it to 83 mil, I’ll set some aside before placing my next bet. :wink:

-Lee

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In 2 years the account was worth around $83,000,000!!! (Hard to believe right!? - True story)
At the end of the crash in 2000 he had $50,000 left.

Thanks for sharing that with us, Musicali. That sort of demonstrates a day trading mindset.

Back in the late 90s a buddy of mine got into day trading full time. He had his computer set up with two monitors in the spare bedroom. He had a “system”. When his wife retired and he took her 401-K to invest…“to double down if he needed to.” When the dot com crash came along he was wiped out. The two of them now sell photocopiers.

When the market is going up day trading can be great. When it goes down is when day traders lose it all.

My cousin is now into it. He had a very fast internet connection installed at his house, because the timing is soooo important. He cashed in his retirement funds because he also needed the extra money. I called him and apologized for butting in, and then told him please not to do this. All day traders wind up losing.

He replied some of them have to make money.

The family says he’s doing well.

He is.

Until he’s not. Then its over.

Jeb

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Hi MusiCali

I just wanted to chime in here in that for a while, I’ve considered options to be pretty much taboo. But after reading through TMF Options and the sister TMF Pro service, I am convinced there are conservative, safer strategies where you can use options.

  1. Write Puts to get a better price on stocks. I typically use this strategy to add to my winners, or to open a starter position during a price drop. So if a company I am holding goes down by a lot, I will write puts. If the price recovers by expiration, then I keep the income and if goes lower then I will have opened the position. In the event of a big-fat-pitch, I will simply buy shares and perhaps write a contract or two at a lower strike price (as long as I am 100% confident in the company!)

  2. Write covered calls. From my previous employer, I bought-to-hold most of my options, so I have a portion of those shares (about 20% of my holdings) that I write covered calls whenever the stock goes up dramatically. I choose a strike price that I am comfortable with selling the shares.

  3. When writing puts I have found that it is easy to get carried away, especially during an extended bull run like we’ve been experiencing. I always have cash to cover the position in the event I am put the shares, and I try to have less than 20% of my cash exposed to all my put options combined.

When combining all these factors, I am definitely not raking in the dough with my option strategies. I am not willing to risk more cash or use margin when trading options. But the bottom line is that there are strategies you can use to generate income or open positions at a discount. It’s like shorting. It exists to augment your returns, but it is easy to get carried away if you don’t set boundaries and start taking unnecessary risks.

I am not trying to plug the TMF Options service, but what I will say is that it is a great resource for beginners who are interested in learning more conservative approaches. It is a friendly environment where many people are willing to provide guidance to newbies like me.

Best wishes

Ted

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Thanks for sharing your experience. None of this equates to options being a bad vehicle for investing. This is a great example of the risks of investing your money through any method when you don’t really understand what you are doing and the risks associated with it.

These themes popped up in that story and are visible in most crushing investment stories.

  1. Someone getting lucky and being “right” for the wrong reasons
  2. Feeding off #1. getting overconfident and downright greedy, putting more capital in.
  3. Using riskier alternatives as “success” builds.
  4. Not truly understanding the companies being invested in.
  5. Big loss, and doubling or tripling down to “catch-up”.

These stories are good lessons, but they are not universally applicable to options. I’m sure there are thousands of people who got burned investing in individual companies that will claim “the stock market is like gambling”, “you can’t beat the market by stock picking, just index”, “having 10-12 companies is WAY too risky”.

Not saying options are the way to go, or even right for me personally. Just saying, when it comes to money, anything can burn you if you don’t understand it, get overconfident, and/or have bad timing, and capital at risk that you might need soon which could put you in a position to have to sell at exactly the wrong time.

  • Austin

Shopify (SHOP) Ticker Guide

For information on all of my current holdings view my profile here: http://my.fool.com/profile/CMFAleeb/info.aspx

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I think it’s great that so many people like options.

…however…

I see them as kind of like Fight Club. If they are your thing, go trade the heck out of em. But in my opinion, talking about them here does a social disservice. Best case scenario is you convince someone to take on risk they don’t understand.

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Did some digging… it turns out there is already a board for it.

http://discussion.fool.com/options-you-make-the-call-113013.aspx…

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I agree, no place for options here. But people are posting their stories after being encouraged by Saul to do so. Those lessons learned are applicable to all forms of investing, not just options, which I why I felt it was appropriate to respond.

  • Austin

Shopify (SHOP) Ticker Guide

For information on all of my current holdings view my profile here: http://my.fool.com/profile/CMFAleeb/info.aspx

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You’ve outlined an extremely aggressive trading posture. Those returns are phenomenal… and so are the risks taken. It’s also absolutely reckless to follow someone else’s trades if you don’t have the trading experience. Even Saul cautions folks here not to blindly mimic his portfolio. If you’re just copying someone else, you’re not learning.

Options are a valid trading vehicle. I’m content to take in 15-20% in addition to my regular portfolio.

That said… like anything else Options trading has a learning curve. I would put that at 24 months of active trading (200 trades annually). You are always learning.

As I trade, I look to learn different trading strategies… for example iron flys… getting a feel for that can be a bumpy road… as is stock investing. As the TT adage goes… trade small, trade often…

Moderation in all things.

🆁🅶🅱

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This is a great example of the risks of investing your money through any method when you don’t really understand what you are doing …These stories are good lessons, but they are not universally applicable to options. I’m sure there are thousands of people who got burned investing in individual companies….Those lessons learned are applicable to all forms of investing, not just options, which I why I felt it was appropriate to respond.

Austin, I’m sorry if it seems I’m picking on you but you are seriously and dangerously misleading people in saying that. You are implying that options are just like any kind of investing, or like investing in a portfolio of individual stocks.

Did you read MusiCali’s experience? He wrote in a previous post that he had been wiped out like Gaucho Chris a few years ago, so I encouraged him to tell his story to warn others. No one invested in a portfolio of stocks could be totally wiped out without using leverage (whether margin or options).

MusiCali went from $90,000 to $20 (not a misprint) in four months. He lost 99.98% of his accounts. He was totally wiped out. That’s NOT THE SAME as having a bad run or “getting burned” in the stock market!!! That’s extreme danger. Chris also wrote about getting wiped out. His very intimate post explaining what had happened to him got over 100 recs.

Sure, sophisticated investors can use options as insurance, or as small, small adjuncts, and you may be knowledgeable and able to do it, but to tell inexperienced people that using leverage is no more dangerous than buying a portfolio of stocks is putting them in danger, and I am asking you not to do it on this board. There are boards for those who want to discuss options.

Thanks

Saul .

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Saul,

I will respect your request, but just know, that is a double-standard.

You encourage people who have been absolutely careless with options to post their experience, but strongly discourage any discussion what-so-ever that is not anti-options.

Never once have I encouraged anyone to use options. If anyone is that inexperienced, or lacks control of their emotions, I would recommend they stay away from investing all together until they are better studied and know themselves better. But that’s a different discussion.

I will not bring up options again here. Even if I get tempted by other people sharing their options experiences.

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Hi MusiCaliand Tedyun

I have a barbell portfolio - some Saul/NPI shares and some very mundane REITs MLPs etc. intended to fund my Cheerios purchases. Keeping the range of risk moderate is crucial when using puts, and one of my frequent transactions is a slightly out of the money put.

I only recently took to heart Saul’s advocacy for meticulous and timely record keeping of portfolio performance, and couldn’t resist roughly measuring the options impact on yields, it seems to be considerable.

I think risk management is key - especially having obviously sufficient capital to withstand drops which would otherwise convert into cash losses. This is not a concept for high volatility portfolios.

In addition to your three methods, I add “down and out.” Selling a long dated put creates risk that it comes deeply into the money and the revenues from such sales is attractive. At the time of liquidation, it is often true that an additional or subsequent sale will create revenue to liquidate the expiring position and extend the time for the shares to recover. They often do.

In a world where the retirement “4% Rule” is being discussed for revision to a “3% Rule,” the tolerance on this board for such yields is obviously non existent. Options are a form of leverage, risk management is always critical when leverage is in use.

Just my two cents.

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In 2 years the account was worth around $83,000,000!!! (Hard to believe right!? - True story)
At the end of the crash in 2000 he had $50,000 left.

It is hard to believe.

When it got to $60,000, I would have just walked away.

AW

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Thanks Saul.
As the creator of this board, you as well have a bad story regarding leverage using futures, so its not surprising that you would empathize with Chris and my story.
As the creator of this board I believe Saul has the right to keep the discussions pertinent to the investing style of the board.
I prefer not to argue or discuss options anymore. I have my beliefs about them and I am ok with anybody who would like to disregard my story, advice etc.
Please take what is useful to you (if anything) and throw away the rest of it.
Please let us get back to discussing investing in common stocks of great growth companies.

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Why do they have to do it with every penny? That’s greed, hubris, and total lack of prudence. I’ve played around with options in a small way, and learned something that way without getting burned.

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Never said it was every penny
Although it was the entirety of those two accounts Ultimately, it was around 30% of my savings.
I’m amazed that people on here assume that I did not know what I was doing.
I was not a newbie at that point, had been around investing for 8 years already.
I wasn’t fully invested at any time- nobody expected AAPL to lose 50% of its value. Kept allocating funds to something that just didn’t turn around for a Very long time
When I visited the CME a professional who ran his own gold hedge fund had similar stories of this happening to people who ran hedge funds and he obviously heard so many options wipeout stories that he wasn’t surprised at all about the guy with the 83 million- in fact he seemed like ‘why are you telling me this it’s such a common story’
Anyway, if you all are so smart and so prudent with timing leverage
I wish you all had been running our banks in the middle part of the 2000s.
Have fun with options if you want to use them
I have no problem with you making your own choices
I won’t put one penny in them now

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Write Puts to get a better price on stocks.

The single most reason why people lose big in options is due to this strategy. If you have 90% success rate and 10% loss, still you will end up losing significant capital with this strategy.

Options are insurance, average investors can buy puts for insurance or buy calls for its leverage but selling insurance requires capital, significant understanding of statistics, time commitment, etc.

That last 8 or 9 years where generally raising market masked the risks of this strategy, this is like picking pennies in front of road roller, all you have to do is get hit few times to be significantly hurt.

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Kingran,

Write Puts to get a better price on stocks.

"The single most reason why people lose big in options is due to this strategy. If you have 90% success rate and 10% loss, still you will end up losing significant capital with this strategy.

Options are insurance, average investors can buy puts for insurance or buy calls for its leverage but selling insurance requires capital, significant understanding of statistics, time commitment, etc."

Writing is selling, not buying.

Gene
All holdings and some statistics on my profile page
http://my.fool.com/profile/gdett2/info.aspx

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The single most reason why people lose big in options is due to this strategy.
————————————————
This is wrong. Writing cash secured puts to get a better price on a stock you WANT to own will not lead to portfolio ruin. Let’s just put aside arguements about whether or not it is better or smarter than just buying a stock you want to own…

Writing puts to earn income isn’t necessarily a bad strategy either. It is only bad or will lead to portfolio ruin if you write more puts than you can afford to be assigned by using margin…

I would also argue that buying puts or calls also requires capital, significant understanding of probabilities, time commitment, excetera…

The use of options requires learning. It’s no different than learning to buy equities. Over allocating to a bad stock pick with little portfolio diversification can also lead to ruin…

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This is wrong. Writing cash secured puts to get a better price on a stock you WANT to own will not lead to portfolio ruin. Let’s just put aside arguements about whether or not it is better or smarter than just buying a stock you want to own…

Writing puts to earn income isn’t necessarily a bad strategy either. It is only bad or will lead to portfolio ruin if you write more puts than you can afford to be assigned by using margin…

I would also argue that buying puts or calls also requires capital, significant understanding of probabilities, time commitment, excetera…

The use of options requires learning. It’s no different than learning to buy equities. Over allocating to a bad stock pick with little portfolio diversification can also lead to ruin… – Cobra

Cobra understands writing puts.

From time to time, I sell puts within my IRAs. They have to be 100% cash secured (per IRA rules), so I run no margin call risk. I typically go real short term (3-5 weeks) and aim for 3%-5% return in that time period. If put to, fine. I only sell puts on stocks I consider to be a bargain and now I have it even cheaper. Usually, I’ll turn around and then sell calls on it. Back and forth. A great cash generation machine that makes dividend investing look pretty wimpy, but it definitely requires more attention and eventually the process grinds to a halt because the stock has dropped too much (it happens) or I find it’s just more profitable to buy calls.

Like any investing process, some transactions make money, some lose. Overall, quite profitable. But you better know what to play and when to stop… and to let the head rule the emotions.

Rob
Rule Breaker / Market Pass Home Fool & STMP/MTH Maintenance Coverage Fool
He is no fool who gives what he cannot keep to gain what he cannot lose.

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