It Was All Gone …

My boss once said that I was the only person he knew who bragged about his losses more than his gains. There is nothing interesting about an investing success. You had an idea, got in at the right time, and then exited at the right time. When something goes right, then you do not spend time thinking about the process and whether or not it held up throughout the entire thing. There are many times in which the investing success could have gone wrong. Yet the only times that people - including myself - actually take the time to evaluate what happened is when what could have gone wrong actually went wrong. This is one of those cases.

I am looking back at my old Etrade trading records in order to help give some clarity on what happened but much of what is written is through personal memory.

Background: What is an Option?

An option is a type of financial derivative, and although it is a pretty fancy name the concept behind it is relatively simple to understand. It is called a derivative because it “derives” its value from the value of another financial instrument. That can be a company stock or a bond. Because the price of the financial instrument (called the “underlying”) can fluctuate from time to time, the fundamental value of the derivative can vary greatly any given second. This is different from that of a company’s stock because its fundamental value is derived partially by the condition of the company itself. That changes over a very long period of time.

The value of an option is very volatile because there is a double market effect on the price. Not only is the market affecting the price of the underlying financial instrument, but the market is also affecting the price of the derivative itself! There are times when a derivative can be under or overpriced by the market just like with any regular stock. The only problem is that this time frame of under or over pricing can last for a very short time because the fundamental value of the derivative changes so quickly.

An option is a derivative that gives people the “option” (thus the name) to purchase the underlying asset for a certain price, which financial people call the strike price. There are two types of options. There are calls, which give you the option to buy something at the strike price and there are puts, which give you the inverse. They let you sell something at the strike price.

The thing about options is that they are assets with limited life spans. The mayflies of the financial world, if you might call it at that (and I believe that I am the first). At a fixed point in the future (called the expiration date), the option runs out and the financial asset becomes worthless. Before the expiration date, the asset is worth something. After the expiration date, if the holder has not sold the asset or exercised it, the asset is worth nothing. So the closer the time gets to the expiration date, the less valuable the asset becomes. I traded weekly options, which are the options with expiration dates at the end of the week (Friday at 1 PM PST). These are the most heavily traded options and - especially with the options with the strike prices closest to the underlying’s current price - have the most volatile swings in prices. People can make relatively small bets on weeklies and then see themselves lose or gain huge amounts of money.

The Beginning

It started on Twitter. I was hanging around the $AAPL tag on Twitter and noticed someone tweeting random numbers just out there. Curious, I soon realized that these were trades that he was publishing. This guy was apparently a stock option trader specializing only in Apple options trades. This makes sense because it allows him to get very good at predicting the price movements of Apple stock, which in turn allows for very successful bets using the options. Of course, at the time the only direction Apple stock traveled was up. The stock had gone from $300 to $600 starting at the beginning of 2012 and had made many people very rich. I had owned some 35 shares at the time and saw the benefits, and the huge paper gains that resulted gave me deep satisfaction during a period of time where there were few such things to be satisfied about.

I am a curious person and I like to try things. One of my philosophies in life is that you want to say “yes” to things. You would have a life with a much richer experience. I decided that it might make sense to go ahead and try a trade or two. A quick fling. See what might happen. Might lose a little bit of money but I am not going to risk a whole lot of money.

Right?

On July 30, 2012 I made my first Apple options trade. I watched the guy’s Twitter feed and when he posted a trade of his I went into my Etrade account and bought the same thing at a price close to what he got when he entered his trade: 2 contracts of the AAPL Aug 03’12 $585 PUT at a quoted price of $2.45 for a total invested capital of $501.51.

Let me show you how to interpret this particular Apple option trade. This option is a PUT, which means it gives me the option to sell shares of Apple. It lets me sell them at the price of $585. One contract represents 100 shares, that is just how it goes. Part of the volatility in an option contract’s price comes from the fact that it is very heavily leveraged. They only quote the contract equivalent for 1 share of that 100 shares so when you trade one contract, you have to put in an amount of invested capital equal to $(100 x quoted price) so for the trade above was $2.45 x 100 for one contract.

When the guy then again tweeted that he had exited the trade, so did I. Not hard. The trade went well as expected and I made $77 for literally 10 minutes worth of work. That is a whole lot of moolah if you think about it. Considering that I only put in $500, this was a pretty good return, over 10%. This quick toe dip in the pool felt great and I really felt that this could be something that could add to my fortunes really quickly.

But I got too greedy.

The Crash

On Aug 2, I decided that I was going to go heavy into this and if things unfold the way that it did last time then I could really put a dent into my bank account. At that time I still saw it as a fling. I would try this out for a twirl, rake in a whole lot of money and then cut the bait when the fish is still pulling. Well, I like to think that looking back upon it now. Had Aug 2 turned out well, I probably would have loved the sweet sweet money so much that no sooner than the next day would I be diving right back into the dragon’s lair.

I happened to have the day off from work so I had the time to trade from home, sitting up in bed waiting and watching my Twitter feed for the guy to tweet. I remember the market conditions that day. The market was down a whole lot, some 1% or something like that and even Apple - mighty Apple - was in the red.

He quickly did and I leapt on it in a real big way. I purchased 20 contracts of the Aug 03 ‘12 $600 PUT at $1.88 a share. With commissions, this added up to a total of about $3,785. A huge step up in investments from the previous trade. Already though as I was putting in the order, the only thought in my head was that a 20% gain from this would be a mere $800. Not nearly enough to make for a day worthy of my eventual goal of becoming a stock trading millionaire.

The puts gained value because the market was down that day and went down lower, taking Apple with it. The puts gained value to some $2, making me quite a bit of money. Dreams danced in my head of doing this for a living. But then quickly the winds began to turn. I suddenly found my paper gains vanishing and the price fell to $1.90. I decided that I was going to double down because I wanted to keep this going. The way that I saw it - and this became the crucial mistake - I saw the option as a stock rather than for what it actually was: A rapidly deflating object. I was collecting pennies right in front of the steam roller and eventually my pants leg was going to get caught in the roller.

And it did. Quickly the price fell to $1.78, giving me a bigger loss. I was now $300 in the red. This was not how it was supposed to go. Looking to finally play this bounceback, I decided to invest the biggest sum yet. 30 contracts for a total investment (ha!) of $5,400. Total invested capital of $9,000. This would be bigger than almost anything else that I owned in my portfolio.

It all quickly vanished faster than I could ever imagine. Within the hour, Apple began - against all rhyme and reason - to rise. This was unprecedented. Apple was probably the biggest company in the world. The market was actually getting worse minute after minute, the SP500 diving everywhere … but Apple somehow against all the factors was gaining ground. It was down $5, then $4, then $2 and then it suddenly was green. I felt green in my stomach. Because a PUT gains value when the stock price goes down, it loses value when the price goes up. Apple’s tiny salmon against the stream move had meant that the price of my puts had deflated from $1.78 per share to $1.15. Then to $1. Then to $.80. I finally sold out at 75 cents for a total loss of $7,000. In just 2 hours, I had lost the equivalent of 4 months of saving and frugal living.

I did not know what I had just done. It felt like I was just playing with fake money. Numbers on the screen and that the game had just went badly and any second now I could just reach out and reset the game console so that nothing gets saved to the hard drive. Unfortunately that was not the case. That $7,000 was real money and I had lost every single dollar of it.

I suppose I could at least count my blessings. I still had some money left from the trade, if not a whole lot of it. That could have all gone. By the next day Apple went up a big 1% and the PUT options vanished and shriveled into the wind worthless. I could have lost the whole $9,000 were it not for my own lack of self-control. But such things did not matter when you feel that your entire life has been set back.

The clock hit noon. Time to eat lunch. Usually I made my own lunch - something plain-cracker-tasteless and bland - to save money but I figured this time … I sort of deserved something more. I walked out and went across the street from the Sunnyvale apartment in which I was living to a cheap Chinese fast food place. I got a plate of fried rice, chow mein and sweet-and-sour pork for $7.95. I just lost seven grand. What’s another eight bucks? I got my food and sat in the corner by myself with my headphones in my ears and iPhone cradled in my palm, looking ordinary on the outside but feeling devastated on the inside. The entire place was empty except for me and I just sat there thinking long after the food had vanished into my mouth. I was thinking, thinking, thinking.

The Rise

You ever have that feeling where you just have to do something? Like your boss says to you, “Hey this is really hard but …” and then you are suddenly just think to yourself, “Oh, bring it on.” That’s me. I drank the shitty tap water in the restaurant and then walked back to my Sunnyvale apartment. The one I found on Craigslist and was living in pretty much illegally. I sat there on the shitty bed and decided that it was time to get over myself and do something about this. I remember exactly thinking the thought, “Jesus, well, I will get that money back even if it goddamn kills me.” I was grimly determined to make this work. And when I use start using the word “grimly” in my self-conversational lingo, you (I?) know that I (you?) mean(s) business. I wanted to get that money back trading options.

I am pretty good at fixing my mistakes. Gives me a chance to make new ones, you see. But in light of the Aug 2nd Incident as I took to calling it, I instituted new changes in my behaviors. No doubling down. Risk only $5,000 at a time. Better to cut bait and collect gains early rather than to wait it out for bigger fish. Always be paranoid. Rules that went against the value investing rules that I had relied on for a very long time before now.

Luckily the market winds were in my favor. Apple was in my favor. Over the next month, Apple began the last tear that it would ever go on, and I was there with all my weekly options to take full advantage. For the next month things began to change. I traded everyday. The Aug 10 ‘12 $615 calls. Aug 18 ‘12 $635, $640 calls. Slowly but surely I began to grind my way back. It was amazing. Small gains at first. $700. It felt good but I knew it was not enough. I lost $220 in two trades. Ouch but not too bad. I gained $222 in the next one and then $1,600 in two trades after that. Those felt really really good. But still I was not done. That hole was still there and I still had to get out of it. They say that the first thing you need to do when you’re in the hole is to stop digging. I kept on shoveling and somehow found myself getting closer to the top. I was getting close to moving out.

I moved out of my shitty Sunnyvale apartment and grabbed a temporary rental in Burlingame. A beautiful place. I remember sitting in that beautiful place in the morning sun with this laptop (the one I am typing on right now), executing trades. That day, August 22nd (over a year ago today!), I lost $1,760 because I went to eat a pizza slice and the trade (10 contracts of the AAPL Aug 24 ‘12 $645 puts) fell out of the building but then I made back $1,200 over the course of that same day. Quick hitters that added up. I felt very good.

Then on Aug 31, a Friday. I closed a magnificent trade. 50 contracts of the AAPL Aug 31 $665 call. Risking $9,000 and gaining over $2,000 in a single swoop. I had made back my $7,000 and change. I do not think that I had been ever prouder of myself in my entire life for doing what essentially had come out to be nothing. I had moved out of the Burlingame apartment and was taking on a futon in a friend’s apartment living room. I traded on a shitty table that bruised my toes if I kicked against it and a cold drafty ventilation system that froze my extremities, and a crappy chair that gave me backaches. But I felt a joy indescribable.

I would not even say that it was all about the money, (though it certainly did not hurt). The money was just numbers on the screen. It a number on the screen on Aug 1st and it still was a number on the screen on Aug 31. What it felt for me was a vindication, a relieved lift. For the entire month I thought nothing but about the trades that I made, the trades I could make tomorrow and the rules that I established. Why did I not follow them? Why did it work? Why did it not work? I became someone unlike myself. Ignoring friends, social obligations, work obligations. I did not care about anything but those Apple weeklies. So when that final digit ticked on Aug 31, I felt like someone returning home from a long time away. Whisked away on Aug 1st. Returned home 30 days later.

The Bad Sequel

This should be the time when I can write here that I got out of the game right then. That Jonathan got up and took his chips and then walked away with just a cool story and his dignity intact. Unfortunately I wanted to write a sequel and as we always know, the sequel is never as good.

Apple’s last big surge was in August of 2012. After that it rolled over to a big loss and from there it was all down hill. I am going to spare you a lot of pain and tell you what happened. I finally reached the top of the hill on a Friday and then the monday afterwards, I did a new trade on Sept 4th and lost $2,976 that day. I traded 25 contracts of the GOOG Sep 07 ‘12 $690 call and lost $1,683 on that almost instantly. Then I rode that Apple train one more time for that day - against my rules, which said that I had to cool off if I took a big loss … but I had done it before and gotten away with it, making a gain to come back to almost even - and then lost another $1,290. A single day, a huge loss. I was getting used to it. The shock was wearing away.

I am going to spare you what turned out to be the most monotonous sequence of days. From Sept 4th to Sept 27th, I lost $5,098. Then I stopped for the month of October. Then I picked it up against my own better judgment, losing another $900 before I finally stopped and walked away for good from it on December 12, 2012. Three months of money losing taking me to a cumulative loss of $12,000. Done in 3 months.

How did I feel about it the whole time during those sad two months? Mostly, I felt a numbness. All it meant to me was nothing. I got obsessed with the idea of coming back. I had done it before and I kept telling myself in my heart that I could take it back to where it was. Perhaps coming back from that $7,000 was the worst thing that could have happened to me. It put in me the wrong-headed assumption that I could do it. That I had it in me. Perhaps it is better that they snuffed it out of me. No misconceptions. Tear the bandaid off.

Thinking About It

They say that the way to create good content on a blog is to do something and then write about it. With that particular person, I believe that they were referring to writing code but I think it applies here to life experiences too. I did this. I have to own it. So I wrote about it.

I know that there are people out there who can do this for a living and that they are good enough to make a healthy living out of it. They might in fact even be rich from it. I am not one of those people. I realized a long time ago that I did not have the patience, mental acuity and the sheer instincts to do well from it. It is just not in my wheelhouse, and I paid a good tuition to the market for learning that particular lesson.

On Dec 12, 2012, I had gone into that day knowing that this would be the last day. Unlike before, this really would be it. If I do not make some good green, I would take it as a message from the gods. I almost immediately lost $679 on 10 contracts of the AAPL Dec 14 ‘12 $530 Put. The first and only trade I made on that day. I sat there at the office with my head in my hands, a headache already at 7:12 AM. And then I stopped thinking about it and I walked away. For good. I started following a procedure that has done well for me many times before: . Every twitter person I contacted about options advice. Gone. Every record I kept of my options trades, archived. Etrade’s emailed trade confirmations. Deleted.

I sometimes get the temptation to trade again. I try not to think about it. I eat peanut butter. I go take a walk. I open up my iPhone and read some articles. Or what works the best, I think about the nights I would feel when I am in bed staring at the ceiling because I cannot sleep because that morning I lost some $2,000 - $3,000 of life savings. Or being back at that Chinese food shop, with crappy chow mein in my face and the total lack of appetite. That usually does the trick.