My Journey to becoming an Option Trader
Over a three year period I went from a mutual fund only investor to a stock only investor, to a debit spread option trader and now primarily a credit spread option trader. During this period of time from January 2008 until December 2010 I read various books and subscribed to different services.
I made my first investment based upon recommendation from the American Association Of Individual Investors (AAII). I purchased over 30 stocks during January 2008 and it was during this month the market started making some large moves both up and down. I also began a subscription to MorningStar and Investor Business Daily and began watching Cramer and Fast Money TV shows. After about six months I began realizing I did not have enough time to monitor financial news on this many stocks since I still had a day job. I scaled back to approximately 15 stocks but I still lacked a real strategy and a discipline approach to investing, I was continuing to search for a better way to invest and make money. The death kneel for me as a stock investor came in October 2009 when I was invited to attend a presentation made by our companies primary lender( at the time I was our company's CFO) by our lender's CEO and CFO. Each of them had just returned from attending discussion in Washington about a program everyone was interested in hearing more about called TARP. This bank's presentation offered confidence in their position related to loan losses, bad debt reserves, exposure to housing etc. I was even able to ask questions one on one with the CFO and CEO and then I felt confident about the bank's future. I went out and bought some stock and two weeks later this bank was forced to sell to a larger firm since it was not going to be a recipient of TARP funds due to its large amount of home equity loans. From that event I concluded if I cannot determine a company's financial prospects from a personal presentation from the CEO and as well being able to look in them the eye to ask questions then what chance do I have of knowing what stocks to buy to make money.
As 2008 came to end my investment portfolio was dwindling and economy along with stock market seemed more uncertain than ever, now what do I do? I believed I still needed to invest in stocks but was uncomfortable with the risk, staying in cash seemed like a doomed strategy by never regaining what I had lost. As 2009 started I began to purchase stocks using Vertical Spread Options. I found I was comfortable with the risk and related reward. Individual stock prices were so depressed during the first quarter it was almost as if any stock was as good a pick as another, fundamentals of stock investing seemed to me to have been thrown to the wind. Fortunately as the summer of 2009 rolled around the market and my portfolio was doing much better but I was still searching for a better way. I has stopped all my subscriptions to AAII, IBD and MorningStar but did join Vector Vest. That summer I also lost my job two weeks before my daughter got married and after 35 years of working decided to see if there was another way ahead for me. I thought perhaps about day trading but the idea of getting in and out of positions in a day or even a few days seemed like a roll of the dice. I began to focus on using the VV system and tested many of their strategies using their "what if" software. After just a few months I thought there were just too many possible strategies to select from and many of the stock were small firms I had never heard of so I stopped my VV subscription.
As 2009 ended it was a very good year for my portfolio and the vertical option strategy had worked well yet I still was searching for a better way. I came across a service called Terry's Tips which primarily sold calendar spread with the idea that by rolling the premium over month to month so one would collect additional income. Still being unemployed I liked the idea of collecting a monthly premium for income. In January 2010 I purchased a variety of SPY calendar spread both call and puts, some out a few months and others out even further to year end. Second quarter of 2010 with the market once again gyrating I found it very difficult to manage these long and short, puts and call positions , how do I decide which to buy/sell roll or close? It was at this time I came across the Iron Condor strategy were premium is collected upfront. It seemed to me like a trade based upon making an over or under bet in a football game just as long as it stays in that range then you make money. I began trading SPY only iron condors and went back a few months to see what range SPY went from options expiration to the next month expiration and began using this method to select where to sell the short strikes for calls and puts. I also began to understand how to better use Greek symbols in trading options. During 2010 I continued trading SPY calendar spreads but only on calls, it seemed as I was rarely successful on calendar spreads puts. I also continued trading verticals on selected stocks (only about 8 to 10 stocks of large companies with liquid options)
As 2010 ended my primary trading focus was on SPY iron condors.
I know I still have much to learn in making adjustments to condors and better using Greeks to manage changes yet at this time I am very comfortable with where I am at as a trader. I actually look forward to Monday and what will happen next in the market and what I may learn. Of course being able to be with my family, play golf and run marathons whenever I want is also a pleasure.
The Option Rookies Blog archive has been very helpful to me in refining and expanding my knowledge of options trading.
If you want to share your story, send an e-mail to blog (at) mdwoptions (dor) com