Sunday, March 3, 2013

How I Blew Up My Account: Part I

Well this has been a long time coming for me. I avoided it purposely for a long time but I'm definitely ready now a time has lessened the pain of past events. This has the potential to be a long post and I don't want to bore anybody so I think I'll probably break it up and maybe expand or share more as time goes on. If anybody wants more info or details feel free to email me at jasonandrewhaas@aol.com.

The short story goes something like this, though I never set out to trade the markets for a living, it was only in retrospect that my account balance and trading activity suggested I had already been doing just that for about seven years. But to be clear when I say making a living my standard at the time lies somewhere far lower than most people. I was single with no debt and low overhead, about $2,000 per month. I also wasn't paying capital gains taxes as I had a large capital loss to make up for. I had about $250,000 in my account and though there was nothing you would call a typical month, over time there was a mathematical average and it was somewhere just below the $2,000 range. There is much more to the story but essentially I was attempting to make a career change and found myself kind of comfortably going sideways. With each month that passed and block of 6-8 months and the account balance is hovering in a safe balance, I had little desire to force myself to look hard for my next career. I always assumed it would just find me through the course of life.

I eventually found something and after a year I admitted that it wasn't something I could see myself doing long-term so might as well get out now and look for something else. I had enough money and long enough track record to feel comfortable giving up guaranteed income for a  prolonged period until I could get through grad school and find my next calling. I looked through my trade log and played with the numbers of what it would cost for school, rent, etc. Even if I could just make $1,000 per month for 18 months and thus dip in to savings by about that same amount, then so what, I burn through $18,000 out of my $250,000. There was also that cost of grad school that I just considered an investment and was willing to write a check up front for about $15,000. What kind of MBA can you get for 15K and where will it get you? more on that later but the answer is not much. But it was cheap enough that I figured it was a low cost insurance policy. The goal was to get out of grad school and find a new job with my trading account capital above $200,000. That was just a self set psychological boundary that I never wanted to go below.

I already realize that this post is too long for most people, even if you were interested when you started reading it. So maybe I'll do a video post and talk you through the charts I was playing with at the time and it might go faster. I just thought I would give some backdrop for how I was even in position to blow up my account.

I'll shorten the story here and say that I started school in June 2008 and we all know what happened in September 2008. It was during the market crash that I decided to liquidate my account from what was then a long only covered call writing account, that was my break and butter for seven years. In retrospect it was just lucky, I was simply long the market from 2002-2008 when it was on a multi-year upswing after 9/11. But I never saw that for what it was at the time. Like most amateurs I figured since I was making money I must be dong something right. That was the foundation of what eventually turned in to my demise. The second leg of this story was I got extremely lucky and placed a large defined risk/reward bet on the market the day it bottomed. I had no idea at the time it would bottom that day, far from it because in fact I used the longest dated options that existed at the time. This was March 2009 and I used the Jan 2011 expiration dates. I bought long call spreads on about eight separate tickers and then also sold put spreads against it. I played with the numbers and best case scenario was account balance would be $300,000 on the upside and $100,000 on the downside. I thought the market was pricing in the end of the world and I simply made a bet that that wouldn't happen.

Now again I got extremely lucky, I took some of the profits off after a month thinking the bounce was too much too fast and we would retrace. I took some more off in May, sometime in September when my balance was exactly at $250,000 I took it all off. Another psychological move that would harm me later....................I'll pick the rest of this story up later this week. Spoiler Alert: it ends badly.




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10 comments:

  1. First I think we all have a story about a trade that set our account back larger than it should have. But to me blowing up your account puts you out of the game for good. Although this event put you out of the markets for almost a year, you still live trade another day.

    Looking forward to part 2! Good to have you back on the blog.

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  2. True, this topic is actually something I'll hit on either in Part II or a separate entry. To me blowing up was losing 50%. I didn't view losing it all as an option. My risk tolerance would have gotten me out before that could happen. However, I never anticipated 50% as an option either so when it happened from my perspective only it was a blow up.

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  3. Jason,

    you blew some of the suspense for me in revealing you had drawdown of 50% lol. No worries, I'm still looking forward to part II; I'm curious to your emotional state after losing 50% and how you got back into trading.

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    1. It wasn't meant to be a two part post but it ended up being longer than anticipated. Sorry for ruining the suspense. I'll have a lot to say on the emotional toll it took and how I made my way back to want to play again. I will finish it off tomorrow hopefully.

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  4. I have the same question as trin. I dont know if i would be able to come back after a loss like that. Every trade after would be affected by that trade.

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    1. The short answer is after a year the pain has largely subsided. Even though I took a large hit I'm still up overall for my trading/investing career. It would be a shame to never make another dollar simply because I got beat up pretty badly. I can tell you that my first few attempts back ended quickly because even though I thought I was ready, or wanted to be ready, I just wasn't. And I didn't know that until I actually had risk on the table. At the moment I'm getting my ass kicked short the ES and I'm relatively fine psychologically. So I would say I've made as close to a full recovery as you can get.

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  5. Short the ES on a day this must be painful. Pain is part of trading, rarely do i ever make a good profit and not have the market initially going against me; you may be ahead of the other bears on the short, many of us are waiting and looking for the next big pullback.

    Keep us posted, you are deep into the fight.

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    1. All aboard the pain train, feels great today. The 21 points I scalped last week were lost in a few hours today. It works both ways so no crying.

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  6. I think that's where I am at in my trading. I am really small in my size, but still my emotions get the best of me at times. When a position goes against me I take action right way and when I break even on the trade I feel so good about I take it off. So I have been felling like I just paying commission lately. A couple of examples When the SPX was falling 2 weeks ago. At 3:30pm I sold a SPX 1395 for 3.30 by 4pm it was worth 5.35. So right at the open I sold 1520 weekly SPX for 2.00. The 1395 came back to 3.40 so I felt I was lucky to buy it back so then I sold the 1450Weekly Put. for 1.50. And since I had no intention of staying in that trade I took it off for 2.85 total. So from being down about -300 and then having a 55 profit on the whole thing. I felt good. I am in a GOOG issue right now. That I can tell you about it if you want. I pay 1.25 per contract flat rate

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    1. Absolutely, share your GOOG trade, that's what the blog is for. I have a little advice on scratching trades at break even and paying commissions. I've done this many times, and then one day I took a look at the charts on every trade I ever scratched, not to see what would have happened if I stayed in. I wasn't trying to to revisionist history. I had a feeling that scratching trades for break even but paying commissions could be done better, so how about setting your closing trade at one tick away from break even so you pay for commissions. What I found was that 100% of the time this would have worked. And this was a large sample size over 100 so statistically significant. At least this way you can scratch trades and not lose a dime! Anyway, just thought I would share. If you've got a good trade log of your past trades perhaps you can look this up as well and see if the same thing applies.

      I've got this on for myself right now. I shorted ES at 1515 and since the break out the last few days my willingness to be short two contracts here has waned. I have an order in to scratch that trade at 1514.75. That's an extra $12.50 and commissions on the trade will cost me $4.

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