Why I lost 1000 USD in trading

The only one to blame for the loss is Amber Tree Leaves. Not trading options, not the market. Me… I do consider this a valuable lesson. Let me tell you why. 

The context

(The article assumes you understand how you make money by selling a put and how managing them can make you a consistent profit)

I am active in option trading. Volatility is one of the key drivers behind my trading income. It is that intangible, difficult to understand concept that is at the basis of the price of options. Well, volatility can be traded as well. Not directly, but there are ways. And I wanted to do this.

Among all the instruments to trade, I picked VXX. This is an ETF that tracks the volatility in the US market by owning a combination of futures on the VXX. As often the case with an ETF, you can either trade the ETF or an option. I took the option.

I wrote a put on the VXX and was able to buy-to-close the trade for a profit. So far, so good. I now also master this mythical beast (or so I thought).

The start of the end

At the start of the summer, I felt was super 100 pct convinced the markets were due for a correction any day. I am sure you thought that as well! Hence, I looked for a trade that would allow me to make money when the market corrects.

I choose the VXX, via options. Why? When the markets go down, the volatility goes up. (In a certain way, volatility express how much fear people have. When the markets drop, they start to fear) And when volatility goes up, VXX goes up.

As a correction was a given, a 100pct sure thing to happen, I sold a put on the VXX once again. When the market corrects, the VXX goes up and I can make money. How? The put will be cheaper to buy back. E.G. I sell it for 0,50 when the VXX trades at 14, the VXX goes up to 17 and the put is now worth 0,25. I thus sell for 0,50 and buy back for 0,25. That is 50pct profit.

And then, nothing happened. The markets did not move. Or, not a lot.

When this would happen with a put that I wrote on my regular ETFs, this would be great. The option would loose slowly value (the famous time decay) I would be able to close for aBoF2009-402 profit. That is how I made money in the past, why not now?

Well, it turns out that the VXX, by design, loses value each day when the markets are flat or go up! Can you imagine? I did not know then. I do know now! Here is why! ( Velociraptor explains it for a similar product).

So, while for my regular options, this is a good thing, it is a disaster for the VXX. It did not take a lot of time for the put to be in the money. I did what I always do: roll the postion. This has worked well in the past, especially when you understand the underlying business and I am willing to own it (for dividend reasons or long term growth reasons).

Remember, I was sure the market would crash! so, I was willing to own the VXX. I did the following: write more puts and buy the VXX outright!

And then, I started to learn how the VXX reacts to stable markets: I goes down.I also stared to realise that the correction might still be months away. As a result, my puts were deep in the money, eating up a lot of my available cash and the VXX ETF I owned was lossing money faster than I could update my spreadsheet! I was shocked… I had set myself up for a DISASTER!

I acted quick and I completely got out of all the trades and licked my wounds. Ouch….!

To make a long story short:

  • I wanted to time the market crash
  • with an instrument that I did not study before
  • and I took a bigger position than reasonable

Never, never, never, never, ever do this! Study what you trade, keep your postion small!

Do I blame the option trading? No. I was greedy, stubborn, trying hard to time the market… I should have known better….

Slowly, I go back to the basic option writing, sticking to my rules. It feels better, results are better.

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31 thoughts on “Why I lost 1000 USD in trading

  1. No worries AT. We all lose money from time to time……and I think your assertion is correct. You were just early, which my investing mentor always goaded me as being “akin to being wrong”. My view is not so harsh, but we have a huge cash position for the same reason. May the correction come soon…..and with a vengence 🙂
    -Bryan

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  2. Ciao ATL,
    Wow that’s quite a ride… As we discussed over at my blog I was into some similar trades myself, getting greedy and trading outside my “comfort zone”… inevitably loosing money! It’s a tough lesson this one, but I am sure that you’ll make the best of it! I do not trade indexes, they are far too risky in terms of losses, but they are more “stable” as huge downs (-20% in a day) are technically possible but very seldom happen. On the contrary stocks can fluctuate that much. Anyways, chin up and look ahead!
    Ciao ciao
    Stal

    Liked by 1 person

  3. Well at least you learned 3 lessons at once. I’m sure there will be a correction at some point, so don’t think your thinking was wrong – like Bryan said, just early 🙂

    At least it was only $1,000, it could have been much, much worse!

    Tristan

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  4. I understand the basics of what you are explaining, but not in-depth at all. What I do see is you not blaming anyone but yourself and using this as a learning experience. Others might find a lot of ways to put it off on others or the market – anyone but themselves!

    Liked by 1 person

  5. Amber, I can’t believe how similar you and I are!! I, too, have been sellings puts on VIXY, and watching it drop. I’ve rolled the position, I’m WAY underwater. Last month, the stock SPLIT, and I now have “non-standard” options on the VIXY that expire on 10 days. I’ve no choice but to get put the VIXY at a major loss (I haven’t calcualted mine yet, but you and I are in the same ballpark). I’ll start selling calls and try to climb out, but I, too, have been burned by the “certainty” of a pending correction.

    Liked by 1 person

    1. Hahaha…! Very similar indeed. For the sake of simplicity, i left out the stock split! Vxx did indeed have a reverse split, complicating the whole story.
      I hope you can manage your position and learn a lot from it.

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  6. I really appreciate this type of post and updates. I’d like to learn about the good options trades as well as the bad before I get my feet wet in the space. While I mostly understood what you wrote about the VXX the one thing that I was surprised by this trade was the fact that you tried to guess a market correction. It seems that every one of our fellow dividend bloggers live by the mantra of never trying to time the market for any reason which is why we make our consistent buys each month no matter how high or low the market is. What possessed you to even think about trying to time a correction? I just wonder that. Thanks for sharing.

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  7. Good analysis, at least you have learned a few valuable lessons and won’t do this again. I expect you to be up an running again with your options trading this month and will recoup the losses very easily, right 🙂

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  8. Thanks for being so open about your financial mistakes so others do not make the same. What I learned from this is that sometimes sticking to the fundamentals is the way to go.

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  9. Well you can think of it this way… You just paid a grand to learn a valuable lesson. So not all is lost. It’s always been tough for me to try and time when a correction is about to happen. I’ve had the same thoughts as you a number of times, but sure enough no correction happens.

    It’s like the old saying that economists have predicted 9 of the last 5 recessions…

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  10. The VXX is a strange animal. If you look at the 5Y chart, it went from 3400 to 35. Not kidding, a -99% performance in 5 years. It constantly melts away because the underlying futures contracts are in extreme contango. It’s not a long-term investment. It’s like an iceberg in the Sahara.

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  11. 1.000€ seems less to me. You won a lot with options and sometime you’ll lose a bit. As long as you win more than you lose, everything is ok. And it is better to lose “only” 1.000€ and gain experience than losing 100.000€ in a few years.

    Liked by 1 person

  12. Hi Amber,
    It’s good that you were able to exit your position rather than keep on hoping it’d correct itself. I think there’s so much psychology in investing, and over-confidence is something to always monitor. That’s why I always like written rules about investing strategy / rules to prevent taking on too much risk.
    Best wishes,
    -DL

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  13. Don’t feel too bad Amber. It’s an incredibly expensive memory that you received. I still remember when I was trading OEX options at 21 and lost $5,000. I will never forget that moment in my life and have guided my trading principles ever since.

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  14. I love the transparency! I used to play options during earnings season and it took a long time before I realized that I was optimistically and blindly buying options for a growth company. I learned not to do that anymore but it was fun when I got it right (even though I was wrong most of the time).

    I agree with sticking to the rules. Rules are there because they will more than likely stand the test of time. Thank you for sharing your lessons and teaching us valuable lessons along the way!

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  15. Thanks for sharing your trading so candidly. I was trading for a while and documented 75 trades on my blog. I definitely experienced a few big loses too. My largest loss was about $300 in a matter of minutes. But with trading, it’s more about sticking to a system then it is about being right all the time. Great advice and good lesson to be learned in the end.

    Liked by 1 person

  16. This is not a standard option nor does it behave like one. You’re not alone. I’ve read a few blogs lately where the blogger was trying to time a market dip with options like this. I avoided them just because I don’t fully understand them. At the end of the day, the price you paid for the lesson was low. To your point. You’re positive for the year, which is what counts the most.

    Liked by 1 person

  17. Ouch just saw this via your October update, sorry to hear about such a disastrous trade! Have you thought about doing the opposite? I often buy puts (not on VXX, but on UVXY, similar to what Raptor does). That way you’re counting on the decay rather than fighting it.

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