Quote from Bradson Petrog:
I recently started trading options, and am looking forward to learning more, and sharing lessons as well.
I have to admit to being pretty darn good at predicting the markets' movements. You'll just have to take my word for it, because I don't have the financial record to back that up.
My biggest problem, I think, has been that I have found so many excellent buy(or sell) situations, that I wanted (and still want) a piece of them all.
I began by funding an account with 15 thousand.
I started out, I believe, to have bought myself into an over-diversified situation. And I found myself being thin on capitol if the trade didn't immediately go my way.
Just to buy one deep ITM for 2-3 months out, could cost as much as 10% of my account worth.
And I don't ever just want to buy one contract. Every time I would do that and the trade went the way it should, I would sell it at a modest 20-30% gain. I would do this for fear that it would turn back and re-test the support I bought in on. Sometimes it would, and I could be glad that I sold before the value dropped, but other times it would just continue to soar on higher and higher without me.
I want to have many contracts to begin with, so that I can sell some when the 20-30% gain comes, but I can also hold on to some in case the stock goes skyward.
So this is what I found my self doing. In order to stay diversified, I would buy calls or puts closer to At the money, or even Out of the money, and sometimes expiring in less than 30 days! I bought these because they are cheap and I can afford to own many. But those things would rot and fall apart almost the minute they got into my hands.
My common sense is telling me to keep it simple stupid. Keep the number of stocks low, maybe even to one or two. Reason being that I can start out buying the safer deep ITMs that go out a few months. If my stock continues to drop after I buy it, then I would have as much capitol as possible to buy more as it drops.
I realize this method is probably contrary to many in here, as most advice I've read is to stop loss almost immediately. I have made very good returns though using this method, and every time I lost using this method, was because I simply didn't have enough capitol to buy the amount needed to complete a terrific rebound.
I am addicted to finding great investment opportunities. I am plagued by both inadequate funds and a lack of patience. I simply don't have the patience to buy stock in a way that brings good returns over months or years, when I know there is a way to bring astounding returns in a shorter period of time, if I just had more capitol, and/or if I can force myself stay out of all the great opportunities I am finding.
Dear Abby, what should I do?
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Hi Bradson,
Wow! "You sound exactly like my me 15 years ago when I first started trading options."
Just like you I decided on deep in the money options with 2-3 months on companies that charted well. I also used modest profit goals like 20% to 30% and only traded one or two companies at a time (just like you).
Everything was going along well and my account was growing.
Then I became inpatient and addicted to trading and wanted to open up multiple positions in many companies (sound familar).
So I ended up with 8-10 positions at one time and the profits
were rising everyday. Until we hit a downturn in a bull market and half of my account was gone in a relatively short time.
The lessons learned were:
1: Do not open more than 2 positions at a time and those positions should be no larger than 10% (each) of your account.
Run a stop and limit loss to no more (or slightly no more) than your average profit that you make per average winning trade.
Lets say your normal winning trade is +30%. Then use a
-30% stop.
Lets look at like a business:
(10 trade month)
7 winning trades X +30% = +210% option gains
3 losing trades X.....-30% = - 90% option gains
Net Profit............................. +120% option gains
With 10% of your account into each trade,
+120% in option gains is a +12.0% account gain and with
commissions added in, roughly a 11.6% account gain.
Also consider in your 2 open positions trading pairs:
1: Calls on an uptrending stock that has pulled back to support.
2: Puts on a downtrending stock that has rallied into resistance.
Lastly if your not batting W/L: 70%, then here is a Win/Loss
Table that shows you what your profitable sell limit and stop should be for various Win/Loss averages, to create a +10% monthly account gain:
Win/Loss Tables for 10% Account Growth per Month (Non-Compounded)
(10% of Account Invested into each Trade)
Based on Approximately 8-10 Trades per Month
Win/Loss = 40% (4/10)
Wins 4 x 100% = 400%
Loss 6 x -50% = -300%
Net...............100% (10% Month)
Win/Loss = 50% (5/5)
Wins 5 X 70% = 350%
Loss 5 X -50% = -250%
Net...............100% (10% Month)
Win/Loss = 60% (6/10)
Wins 6 X 50% = 300%
Loss 4 X -50% = -200%
Net...............100% (10% Month)
Win/Loss = 66% (6/9)
Wins 6 X 35% = 210%
Loss 3 X -35% = -105%
Net...............105% (10% Month)
Win/Loss = 70% (7/10)
Wins 7 X 30% = 210%
Loss 3 X -35% = -105%
Net...............105% (10% Month)
Win/Loss = 75% (6/8)
Wins 6 X 30% = 180%
Loss 2 X -40% = - 80%
Net...............100% (10% Month)
Jeff
