When you’ve been trading for as long as I have, you’ll remember seminal events from your trading career that run along the spectrum from huge wins to awful losses. I remember trading lessons with pinpoint accuracy, not because I like to reminisce over past glories or failures, but because I want to learn what worked and avoid making the same mistakes twice.
Let’s face it: trading is a mental game. You can overthink a situation to the point that you talk yourself out of a trade, feel regret, and then end up breaking your own rules to get in on the trade.
When I think about my biggest trading wins and blunders, I am reminded that I need to be humble and disciplined. It’s the only way I will survive. Because I want to be around the for the long term, my experience, instincts and plays are critical for options trading success. If I make one or two bad moves, I could be sidelined for a very long time.
It’s very important to learn from every situation, hence I am sharing one of my trading lessons / horror stories in part one of a multi-part series. (Don’t worry, I’ll share stories of big wins, too!)
Trading Lessons: The Day Google Flushed Me Down the Toilet
It was spring 2006. I had accumulated a large amount of Google call options (a very bullish bet), feeling rather confident the stock would rise sharply. They were valued at about $30,000, they had different strikes and expiration dates (before weekly options were expanded as they are today), and I had no put protection in place whatsoever.
The markets were rising, Google was a very strong stock, institutions were buying it like crazy, and I didn’t need to waste money buying insurance, right? At the time, Google was not far off its all time highs. Plus, I was not “all in” with Google or the markets, and I had plenty of cash on hand. (I had already learned the “all in” lesson the painful way – I’ll cover that story in my next article.)
At the time, I had only been trading from home for a few years. I ran a couple of investment newsletter services, was refining my technical analysis skills, and experimenting along the way. My results were decent, but back then, the market was very forgiving.
So, on this morning in 2006, we were about 25 minutes into the trading day when mother nature called. My kids had just left for school and I was alone in the house. I left my computer open on my desk and went to the bathroom. Google was flat, my other positions were not doing much, and the market was slightly up.
I came back about ten minutes later, glanced at my screen, and nearly had a heart attack. My Google position was DOWN $25,000! At the time, this was about 60% of my trading capital. It had to be a mistake, right?
I started scanning the Internet to find out what happened. Nothing was on CNBC, but then I found it: The CFO of Google was at a conference and said, “The growth rate of Google cannot stay like this forever.” And just like that, Google plunged about $30 a share, or nearly 10%. It moved down another $10 just minutes later. The spread on my calls was so wide an 18 wheeler could fit through it. I couldn’t get out of them at a decent price even if I tried. At this point, there was nothing I could do. I just had to sit there and watch.
I was beside myself. This had to be the most expensive bathroom break in the history of mankind. This had not happened to my account since 2001 (a story for next time). Needless to say, a profanity-laced tirade followed (it was a good thing my young children were out of the house!).
My call options continued to drop sharply for days, and all I could think was, “How could my timing be so bad? Was it karma? Murphy’s Law? Was this a sign of things to come? Maybe I should not be trading options at all?” I had been so confident, but at this point, I was completely devastated. I finally sold my calls for a big loss when it became apparent that the stock was not going to recover to my strike – decay was going to work against me.
It would take months for me to recover the huge loss I suffered that day. But I learned my lesson and established a new rule – never take a bathroom break without having some protection in my portfolio. There are other trading lessons to be learned from my hubris: do not be aggressive, do not oversize trades, and when nature calls, the markets won’t wait for you!
Copyright: leeser / 123RF Stock Photo