Hello everyone. This is a post from your’s truly, Lizard King. I retired from the corporate grind at age 40 on 5OCT2012 to trade for income full time. I have less money than I did as a corporate drone, but a lot more happiness. I blog to show others it can be done and how to do it. You can follow my efforts at http://velociraptor.cc
How did you get an interest in option trading?
I was a subscriber to a Motley Fool service and got an invitation to a new options trading service. I gave it a try and was hooked.
What actions did you take to learn on option trading?
The Motley Fool held my hand through dozens of trades. I later decided that it would make more sense to focus to give up some premium income to focus on names with more stability. I now trade exclusive in stocks I already want to own.
What is your goal/ambition?
I achieved my goal 3 years ago when I retired early. It is a stress free lifestyle with a great deal of flexibility. I also get to spend more time with my Father. We eat lunch together about 4 times a week now.
How do you describe your style? Did this evolve over time?
My style is find trades that will equal or surpass the results of indexing with lower risk. At first, I chased yield. I had to get burned a few times to understand that the way to maintain and grow a portfolio is to obsess over risk management. Today, I have most of the portfolio in high yielding MLPs, REITs, and BDCs, plus some bonds. My income needs are about 95% covered by interest and distributions so I am not forced to take bad trades to maintain my lifestyle. It is critical in my opinion that you can set a floor (I like 12%) and pass on any trade that doesn’t qualify. I have passed on two trades recently because there wasn’t a 12% level buyer.
How much time do you spend on trading options?
It is only a few hours a week. I have my headspace filled with it almost constantly though. I’m a little bit of an addict.
How do you deal with the risk that comes with option trading?
Done right, trading options has lower risk that buying stocks outright. In my case, I prefer to sell (write) options rather than buy them. When you buy an option, time is working against you. If it ticks down to zero and you are out of the money, you lose the entire investment. If you write an option, you always get paid cash up front. You keep the cash win, lose, or draw. And if you only write puts on companies you’d be glad to own at the contract strike price, even your ‘losses’ are wins. You can usually then turn around and profitably write covered calls against the position while you wait for price recovery. But picking an underlying stock that is not inherently risky is the most important consideration.
What tools/sites/blogs/podcasts do you read on option trading?
I haven’t found many tools that are option trading specific. I like the products from Stansberry and Associates, although they can be a little pricey. They have a couple of options specific programs I no longer subscribe to because the suggestions were very close to what I was already doing. It seemed silly to pay someone to tell me what I already knew. The products are Daily Wealth Trader (about $50/month) and Retirement Trader (about $2500/year). Those interested in seeing the general idea in action for free can follow my trades at my blog: http://velociraptor.cc
What is the size of your option trading account?
My total portfolio is about 350,000 US dollars. The account I do most of the options trading from is a little over 200,000 USD.
Where do you get inspiration for trades?
It is mostly a matter of trading in the same names I’ve traded in for years and found good results in. I follow the financial news but that is mostly about high flying names like Tesla and Facebook. Not in my wheelhouse. I like businesses with strong profits and cash flows.
How do you track your trades and P&L? Where can we follow your results?
I keep track of everything offline in an MS Excel spreadsheet so I have something to verify tax records. You can see my results at the blog and see my open options positions at: http://velociraptor.cc/open-positions/
What is the worst trade ever you did?
This is a little embarrassing. I wrote some naked calls on UVXY (not recommended!) It worked out OK so I did it again with a larger position. That worked out too and upped my exposure again. A few months later, I had 40,000 in premiums outstanding on the front month naked calls on a near the money strike. I was feeling pretty smart because I thought I had made over 6 figures in about 5 months. But then the Greek crisis hit and volatility soared. Over a fifteen minute period after news broke, I saw my position go underwater and rack up losses greater than my annual salary. I ultimately came out relatively unscathed as my total losses after my previously booked gains were only about 18,000. But it could have been a lot worse. With a naked call, you exposure is unlimited. Forrest Gump’s Mamma always said “stupid is as stupid does” but Lizard King says “stupid is as stupid doesn’t learn from their own mistakes”. Even better is if anyone reading this can learn from my mistake and not need to touch the stove to learn it is hot for themselves.
What is the best trade ever you did?
The best trade I ever did is similar to the worst trade I’ve ever done: UVXY. UVXY is a double levered volatility tracking instrument that suffers from rapid decay due to tracking error and contango in the futures markets. Since my mistake with naked calls, I have been buying long puts out of the money on the LEAP expiry. Time is on my side that way as UVXY tends to lose about 80% or more of its value every year. I once made over 500% annualized on UVXY puts. I have closed many trades over 200% annualized this way since about 2011. It is the main way I was able to finance an early retirement.
Where/how can we follow your progress?