Sunday, January 31, 2010

Thoughts on Email to SMB

As I review this email, I get bugged by my comment that stating "I had traded options in my own account with marginal success".

I have to sit back and ask myself what I mean by that. So let me share my thoughts. When I first started trading I started my account with about $18,000 in 2007 (Well I I actually had a smaller account with where I first nibbled in stocks, about $2,000). I had experienced some success in that sharebuilder account and had decided that I was ready to put some more money in and that I would need a better broker. This is when I found the discount broker I funded my account with the $18,000 and never looked back. Let me remind you that this was still during the time that you could just about go long anything and make money. There really was no skill involved. So I did. I was so long that I had my $18,000 invested as well as the other $18,000 that the broker would let me borrow. In about 6 months I had made almost $10k, this was mostly just trading equities with the occasional covered call.

I had no system. I would buy stocks I heard on Fast money or Mad money. Or stocks I read about in some of the market books I was reading. But to be honest I was on cloud 9 because I could not lose money for the life of me or so I thought. I had been fooled by mother market and the big kids on the play ground that all the market did was go up...but gain some experience and the market will humble you.

I thought I was so sophisticated when I started trading covered calls. I stumbled across a website called Here you could find the highest yielding covered call plays. Now I know that a 50% premium for a two month covered call spells trouble. But at the time all I could think is "holy shit", I had found the holy grail. I remember it so clearly, the stock that did me in for a sizable loss. It was GTOP, it was some bio pharmaceutical company that was in phase 3 clinical studies of the only drug in its pipeline. I know now that with out this drug the company would go bust. But I did not understand or even care at the time. I was allured by the high premium that I could collect from the covered call. So I bought 2000 shares and sold 20 covered calls. I collected like $2 bucks on a $4.50 stock. I read up on the company and convinced myself that this drug had to be past and that this company could really have some real upside potential and started thinking about doubling my size going into their release of the results of the phase three in December of 2007. This is where I made my next mistake. The day it was going to release its results after the bell I decided to by my calls back at a slight gain and bought 2000 more shares for about $3.75.

I had to sell off some of my positions to do this as I did not have enough margin. Now I had $16,500 into this company. They reported after the bell and let me note that I did not have after hours trading ability so I would have to wait until the next day to make any move. The results were disappointing as they were not what were needed for the FDA to approve the drug. I watched it drop from about $3.75 to $3.50 then $2.75...Now I have some heart burn...Then $2.25 and then it look to stabilize around $1.75 or so I thought.I calculated and realized that I had just lost $9,500, all the gains that I had made since I opened my account.

But the bleeding was not over. I woke up extra early to watch the stock. Holy shit it was trading at $0.75. By the time the market opened I sold the entire position and collected an average of $0.72 a share for a total loss of about $14,500. I could not believe it, I had just lost all my gains and 25% of my account value.

I sold out of all of my positions and took a step back to re-evaluate. I asked myself if this is really something that I wanted to do? What did I do wrong? Was I just lucky before? And if I were going to be successful at this what did I have to do.

At this point that is when I put my nose to the grindstone. I decided that if I was going to be successful I was going to need to understand how the market worked and really understand the instruments I was playing with. I stayed in cash for most of 2008 as I educated myself in the market as a whole and more specifically in options. I still stayed up with the markets on a daily basis, but was not involved as I had decided that I did not possess the knowledge to play the market, especially during everything that was going on in 2008.

The loss was really a blessing in disguise, because it probably saved me from losing my entire account through 2008. I also got to see two market extremes and come to the realization that anything is possible for mother market. I did not start putting my money back in the markets until May of 2008. I was much more conservative with my size and positions I chose to put on. And was not about to use any borrowed money from the broker.

The problem is I still had no system. And from all the trades I spoke too, they all said that you have to have a system. I went through 2008 and half way through 2009 hitting lots of singles, just trying to slowly regain my account value. By may of 2009 I had finally got back to about break even. Which for 2009 showed a pretty decent return.

I continually learn everyday and know that there is still a ton to learn.

Anyways, I just wanted to share.

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