Journey to a Million with Options Trading

On May 18 2016 21:27 shootair wrote: So I have some money I'd like to lose and never see again. This sounds like the place that could make this dream tru...The OP sounds like someone who has a past criminal record or other shady past and is now trying to start their next fail-proof venture.

lol. I don't know how I can make the above happen, when I'm not selling any products or service.

On May 19 2016 03:25 hhse wrote: Show nested quote + On May 18 2016 21:27 shootair wrote: So I have some money I'd like to lose and never see again. This sounds like the place that could make this dream tru...The OP sounds like someone who has a past criminal record or other shady past and is now trying to start their next fail-proof venture. lol. I don't know how I can make the above happen, when I'm not selling any products or service.

Oh ok. What's your education and resume?

Was just introducing resources that I thought was interesting and useful.

Degree in Accounting + CPA, worked in audit->management accounting-> commercial manager ... but irrelevant to investing.

About 3000 trades in options & futures year to date. Up just over 40% YTD on 6 figure account. On 2nd year of trading. 2 month in on sabbatical to focus on investing.

On May 19 2016 18:05 hhse wrote: Was just introducing resources that I thought was interesting and useful. Degree in Accounting + CPA, worked in audit->management accounting-> commercial manager ... but irrelevant to investing. About 3000 trades in options & futures year to date. Up just over 40% YTD on 6 figure account. On 2nd year of trading. 2 month in on sabbatical to focus on investing.

lets us know when you're a millionaire

reading this from the other side is incredibly funny. some of you present really good arguments about how to look at trading and how to look at returns.

leveraged trading is difficult and options even more so. the more complex the product the more complex the risk.

that being said, i definitely don't believe in efficient markets. the markets are made of people and while they are generally "efficient" on the whole there are usually a lot of opportunities available.

I felt I should provide some insight in this thread given some of my experiences but perhaps I am setting myself up for troll bait. I figure I'll discuss some basics of the trading industry and then go into some basic options strategies that you might like depending on your goals.

I used to work for a market making firm on the exchange pits of the CBOE (Chicago Board Options Exchange) for about two years before ultimately deciding to pursue actuarial interests. As a market maker, it is your job to set bid/ask spreads, similar to how a casino sets a sports bet line. Market makers are legally required to set a bid/ask on any product that a customer is pursuing. A customer on the other hand, has the option to view all markets provided and select the desired choice, vs the market maker who must take the opposite side of the customer. Market makers tend to have a massive edge on customers in a highly volatile market place because they get to utilize the bid/ask for themselves and will out volume other traders while investors tend to have an edge in markets where one-way trading is occurring and have the advantage of selecting their investments. The downside of the customer is the brokerage fees will be massively higher on a percentage basis in the long run.

First and foremost, options trading is extremely risky and you very well need to know what you are doing before you jump in. I have witnessed guys who have had 7 figure incomes for 10 years and multi-million dollar homes completely blowout in year 11 because they took too much risk or were too stubborn to readjust their trading strategies. A lot of trading is mental and people that are weak in that department will have a very hard time making rational decisions and having appropriate discipline. With that being said, I do believe that options are an excellent way to produce an investment return if you are willing to put some time in to learn the intricacies of how they work. The advantage of being able to protect from both sides of a market is huge and while you may have to pay premiums upfront to purchase your options position it doesn't hurt to have a little insurance vs buying stock straight up.

Typically, the success/failure of a trader comes to adjusting to market conditions and minimizing potential risk. It is very easy to continuously pursue a strategy that works for years and be reluctant to change when market conditions start behaving adversely. The key thing is to go in with a plan and stick to it (I want to make X, I'm willing to risk up to Y). If you aren't sticking to your plan, refusing to back out when thing are going the wrong way, or trying to chase loses, you have officially turned yourself into a gambler.

From my experiences in trading, I would say people fall into these three categories...

The gambler/dickswinger - Not going to lie, I miss watching these guys behave in the exchange pits sometimes. If you fall in this category, you generally have so much money available you do not give an absolute fuck what you are doing. Most people that fall under this category make big bets with big money looking to absolutely kill the market. Clearly, I think all of you would understand this is probably the the most optimal long-run strategy. That being said, it only takes one sick bet that works to make tens of millions of dollars and sometimes these guys just run good and look like geniuses. If you got a lot of money that you don't really care about losing any of it, I think it's better for you to actually try this route rather than donking it off at a casino.

Advantage: You can make more money than anyone ever potentially
Disadvantage: You can lose more money than anyone ever potentially

The casual invester/trend follower - Typically, these people will be the average joe who reads up on a bit of financial news now and then is looking to try to make some smart investments for personal gain. In the exchange pits, these guys tend try to follow what everyone else is doing. You are typically "going with the flow". You actually can have some pretty decent success with this methodology. Your disadvantage would be that you never get in at the lowest/highest points ever because you are waiting for the trends to emerge. Most of these people will make small calculated trades based on some basic research but will typically not lay it all on the line.

Advantage: Can scalp profit potential with lower volume. Have full control over one's investment decision.
Disadvantage: Won't have the tools/technology to match professionals

The math dudes/nerds - People who fall under this category typically have designed or use an options pricing model based on the Black-Scholes formula or a modified variant of it (Basically it's a formula that prices options). Since all the prices of the options are seen in the marketplace, the model reverses the formula to solve for what is called "implied volatility" and adjust this value based on where the prices are in the marketplace. The idea is to know the theoretical price of every single option and to try buy below it or sell above it to collect theoretical edge. For the most part, this is used mainly by market makers but individuals who have access to something like this can also use it to help them with their trading decisions.

Advantage: You got the theoretical model for option prices, making it easier to target better potential opportunities. Typically can get higher volume in if used in a market maker setting.
Disadvantage: Models are not full-proof. When market conditions become a fuckfest you can throw your model out the window.

I think the most important thing if you are going into playing around with options is to ask yourself what your investment goals are and what you want to achieve. People want different things and you should approach this trying to accomplish what you are looking for while knowing the risks you are taking. You can trade options on individual stocks but I prefer options trading on an index like the S & P 500 (SPX,SPXW,SPY options) because an index that is comprised of multiple stocks has less directional risk on a given day than an individual stock. Here are some basic potential strategies you could look at depending on what you are trying to do.

Short-term massive gains - Take a look at options that have low expiration time (they will be cheaper) and high delta (more payoff on directional risk). You can consider buying straddles (put + call) as well. The goal is to maximize gain in a short period of time while not paying as much money upfront (a month out options cost way more than a week option).

Long-Term gains - Typically most people will look at options with a far out expiration so that there is a enough time the market may go into the preferred direction. The disadvantage from above is that you will have to pay more upfront to go long. I would suggest either looking at mutual funds or standard stock investments if you are looking at the long-term.

Small % gains/credit spreads - Here you are looking to make small gains with a large amount of money (Trying to use $10000 to make $100 for example). The easiest way to do this with options would be to sell out of the money spreads that have almost 99% chance of finishing out of the money. Since market makers are required to provide a bid/ask, you can typically find markets at .05/.20 on way out of the money spreads. The disadvantage is you have to hold up a lot of your money until expiration and if the market goes extremely adverse you might have to bail on a big loss. There is the advantage of being able to bail early though so you will never fully lose the max amount if you are disciplined (Like surrendering in blackjack). For the most part though it's a way to get some almost free money leveraging a lot of capital.

Hedging - Most day traders will trade this way. The idea is that when you buy a call/put you negate the delta risk by selling/buying the corresponding stock or a future. You basically create an artificial straddle without spending as much by buying a straddle directly. The goal is to set delta risk to 0 and then play with the other risks (gamma - movement, vega - volatility, theta - time decay). The disadvantage is it's complicated if you are just a basic options simpleton and requires a strong knowledge of options markets.

Entertainment/Creativity - The cool thing about options is you can make some whack weird ass spreads. If you are looking to just put on cool looking positions and see what happens, you can get pretty creative. I've used optionshouse before as a brokerage site and it's pretty simple to set up whatever you are theorizing about. This doesn't necessarily mean you'll have instant success but you could probably have some fun doing this.

Hope this was insightful for people. I kind of just slopped it together so maybe I've got some errors in here. Just want to reiterate that I'm just sharing my views and don't want to force anyone into this stuff. There definitely is potential for gain though I will tell you that.

TLDR cliff notes
-Options are risky and you should know what you are doing
-I feel options are a good way to approach making some money
-Your strategy should depend on your financial goals
-Have a good plan going in and stick to it
-Understand the risks you are willing to take
-Try it out, you might think it's cool


If you have personal questions you can PM me or post here. I am not a professional trader but I do have some industry experience that maybe I could provide insight on.

Nice post.There may be things that are slightly misleading.

Market makers also compete against other market makers for trades, and eventually a fair mid-point is arrived at with tiny spreads (liquid products). Retail traders should only stick to trading these products and not illiquid/low volume products that you alluded to. Market makers also receive commission from exchanges to facilitate trade, and market makers hedge these positions with other products - that is why they are paid. So it's not about the retail trader vs the market maker.

Yes, unfortunately they are real strategies that send a lot of retail traders broke.
- when you buy options (naked call, naked put, naked straddle, naked strangle), they are directional plays OR a race against time. Unless you are a 'technical' analysis guru or 'gambler' or want a 50/50 shot (debit spread), it would be a bad trade.
- everything is about risk/reward. If you are selling 99% probability OTM, you will struggle to make enough money to cover off on losses for a 'black swan' event.

Agree, options are cool, and you can vary the strategies to suit your risk profile. Hedging is only complicated if you don't have the appropriate platform that assists you - Think or Swim, Dough, Interactive brokers allow you to beta weight to index/ETF of your choice so it's easy - there may be others, just ask them.

Trade across non-correlated products (e.g commodity, money market, stocks, currencies,metals, energy), small positions, good risk/reward trades are good practices. People go broke because they trade too big relative to their account size.

On May 30 2016 17:14 hhse wrote: Market makers also compete against other market makers for trades, and eventually a fair mid-point is arrived at with tiny spreads (liquid products). Retail traders should only stick to trading these products and not illiquid/low volume products that you alluded to. Market makers also receive commission from exchanges to facilitate trade, and market makers hedge these positions with other products - that is why they are paid. So it's not about the retail trader vs the market maker.

That is correct thank you for clarifying that point. I made it sound very market maker vs everyone else in my post which isn't necessarily the case.

As I mentioned earlier, at the rate I was going, I was never going to see a million dollars (not that it is a lot nowadays) until decades later. I got into options a couple of years back and made modest returns last year on a small 5 figure account.
I figured, heck, I've developed a relatively strong confidence level and was ready to scale up.

So earlier this year, I took profits on my cheap mortgaged investment property and amassed my savings from the last few years of working as accountant to fund my investment account. I managed to scale this up to a low-end 6 figure account. I resigned in March from work and by May, I managed to grow the account by 40% (already matching my yearly salary).

In June, I found myself short a bit too much bonds through brexit - a clear mistake (but not enough to kill me of course), so my account remained stagnant and I lost some of the earnings I made. July was intentionally quiet for me, as I did not want to carry positions while I was on my winter snowboard trip. Which takes me to now... currently up 60% and approaching 6 months post resignation.

I'm at the stage where I feel confident in trading a modest sized 6 figure account and am ready to scale up my account again. So I recently applied for full-time work, and in two-three months time, I'm hoping to take out an additional 6 figure loan and put that to work along with my current capital. I'm happy that I got this far and I feel like I've learned so much this past year.

If all goes to plan, I feel like I can reach my 1 million dollar mark (after paying back the loan, after paying tax) in no more than 4 years (being conservative on the returns). I just feel a lot happier now, as it no longer feels like a 30+ year quest.

Started working as a business analyst: 8:30am to 5pm with about 1hr15min commute each way - things are on track.
I sleep for a bit after work, then wake up to trade between 12:30am to 3:30am and then head back off to sleep for a couple of hours. Rinse repeat for the weekdays.
Sometimes, I do ask myself, is it worth it? I think it is... and I truly do believe that this lifestyle is only temporary until I've built up a solid capital base. I don't want to live out the rest of my life,
relying on 'government' benefits. And I want to buy shit, when I want, for who I want, and not worry too much about 'budgeting'.

Anyway, trading a larger account, year after year, after year, from <10K all the way to where I am now, has been emotional to say the least. It irritates me that non-traders think that if you are successful in trading a 10K account, then it is exactly the same as >300K account, because gains, losses and P&L swings are expressed in percentage terms and everything is all relative. I can assure you that when your account moves 5%+ against you on a 10K account over a few days, the same 5%+ on a 300K account can feel like eternity in hell (and not because your sizing or trade mechanics are wrong).

Having said that, when I am not phased, and simply get on with just repairing the situation, I know that it is a good indication that I'm ready to scale up my account even further. The original plan was for me to take out a loan from the bank,
but, I feel that having this looming debt & interest charge in the background may again, change how I trade. I don't want that, so I'm conflicted... anyway I'll think about it, and come to a conclusion in 2 months time.

I've included my progress report below. The graph was done a few weeks before the P&L snapshot from brokerage account. As you can see, I'm sitting about 2% below my peak. Having been through Brexit, with the blackswan move in Bonds that went against me; having been through the U.S election with abnormal unexpected moves; and the 28% drop in NG against me, and 20% CL move against me in past few weeks - I'm happy with my 78% return year to date.

Until next time.

bump

--- Nuked ---

So you're selling an insurance policy that you win most of the time but on the improbable time that the insurance is triggered, you lose huge? Is this kind of like playing reverse tourneys in poker where you bet your friend a dollar he won't make final table in the tourney and you win 99% of the time but when he does, you lose 10,000?

I just want to jump in here and say that i personally know OP. He's not spruiking anything or trying to sell anything. He's verified his results to me, and he's quite knowledgeable on the subject. He is very open with how he has learnt and his motivation for doing so - if you guys are interested you can learn alot about how he trades. Obviously his methods aren't for everyone, but they are certainly working very well for him.

On December 11 2016 14:56 Nitewin wrote: So you're selling an insurance policy that you win most of the time but on the improbable time that the insurance is triggered, you lose huge? Is this kind of like playing reverse tourneys in poker where you bet your friend a dollar he won't make final table in the tourney and you win 99% of the time but when he does, you lose 10,000?

No. 99% probability of success trades are poor in risk vs reward. I sell a lot closer at about 60-70% success range on average.

cool posts. thx for the insight.

Maybe one day when i have more free capital to work with i'll start getting my feet wet with this stuff. It's always fascinated me.

Worked as an options trader at a prop shop for a couple years. What K40Cheddar says here is completely true: First and foremost, options trading is extremely risky and you very well need to know what you are doing before you jump in.

As a professional, the easy money came from everyone who thought they could beat the market. Before you jump in thinking "how hard could it be", the answer is VERY HARD. You have to have a strategy you have backtested a number of years, a system where you can execute your trades without missing or having much slippage, and you're paying WAY more than trading firms are in terms of trading costs. Just keep that in mind before you start trading.

I made 40k today on options (but lost 60k 3 months ago) but my only strategy is to buy calls and buy puts, usually out of the money.

On December 15 2016 16:38 Nitewin wrote: I made 40k today on options (but lost 60k 3 months ago) but my only strategy is to buy calls and buy puts, usually out of the money.

Strategy sounds legit

On December 15 2016 16:38 Nitewin wrote: I made 40k today on options (but lost 60k 3 months ago) but my only strategy is to buy calls and buy puts, usually out of the money.

Sounds like you're just gamboling, lol.