When all the systems and mechanics run like a well oiled machine, you need to be vigilant. That is the time that greed can come and say hello. I do have the feeling this is happening with me right now.
Is this a pattern that happens to others? You are running your race, all feels good, and then, you decide to tweak a little bit.
For the last few months, the system of trading options was working just fine. With 12pct annualized return, I should not complain. And yet, I thought I could do better, that I needed to do better. I started to stretch a little bit the system. Why not..!
In my system, I close my trades early, to realize my gain. I aim for 50pct of the max theoretical profit (the premium received). The last few weeks, I have been deviating a little bit.
Why?
I was sure that nothing could happen, that the stock was strong and would remain strong. So, why close the positions? Let’s go for max profit and publish a new record!
This sounds all to familiar… I had the same about a year ago… That is when I lost 1000USD over the summer. Not again!
Good that I have the experience from last year. I immediately took action as soon as I realised what was going on.
I closed one position and still managed to make a profit. Less than I would have made when following my system. More then just doing nothing and keep going on my conviction. That stock is now going lower.
I had a gamble trade that went against me. Rather than thinking: it will be ok, I closed the position and made a small loss of 13USD. That is ok.
I still have one trade that is on the dance floor. It should have been closed a week ago, when I had my 50pct of max profit. I decided not to, you know, strong stock, can not go down,… I have now 5 trading days left. Let us see what happens.
A last one has been rolled. Nothing much to do about this one. It has always been on the dance foor, never reached the target profit. I should not have written the same strike in the next month before closing this trade.
To a certain extent, I am mad at myself for making yet another mistake. All mistakes are part of the learning. The good thing is that I realised this time that sometihng was wrong and took corrective action in due time.
When trading or investing according to a proven system, you should stick to the system. Tweaking is not a good idea.
Action plan for myself
- decide on the right time to start the monthly investing again. This was stopped when I took the job in the startup. to accumulate more cash. How much more do I need?
- Stick to your trading system and stop chasing yield. The returns will be what the returns will be. Other traders and bloggers will have other returns. just make sure that you sleep well at night. that is goal one!
Do you have similar stories?
amber tree leaves 
Ciao ATL,
I have a ton of these stories… In many aspects investing is similar to gambling, there are many similarities on how the two are approached by our mind. I still have on me a series of trades that are totally sour, have been there for over an year some of them!!! All because I wanted to get 100% profit, instead of settling for a lower one, or because I traded on a movement (DBK) that reversed and let me stranded with a position extremely deep in the money (and I did not know the stock all that well). Other cases happened with options being called away much earlier than expected, I wasn’t checking the remaining time value… All boils down to greed, in the end. Now I have decided to be more strict, i will trade only in dividend paying companies, selling long calls on core stocks to increase the dividend. On non-core companies I have decided to allocate a chunk of my money and I can trade very short puts and calls (provided that they are all covered)… Let’s see if I can get less sour trades this coming year, the old bad trades are eating up a lot of resources unfortunately… 😦
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Similar indeed… All the best in avoiding sour trades! I have again a lot of ITM options, rolling rolling rolling
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Hello ATL, how do you choose what strikes and what stocks to pick for selling options? Do you use technical analysis (graphs)? I started learning options in February this year as paper trading. Since July I’m trading with real money. My target for closing the positions is 80 % of premium received. But I prefer selling cash secured puts at the moment. I don’t do a lot of covered calls.
Nice blog by the way. Have a nice day
Marian
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I have a post on my favourite stocks: https://ambertreeleaves.wordpress.com/2017/06/15/trade-inspiration/. I try to use either a one standard deviation option (16 delta) or what a chart tells me what would a resistance level.
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What a great post! All to often the blogs are all about showing your gains/skills. This post is about you realising that you were straying from your own path, good on you!
I think I’m making mistakes all the time, but thankfully with every purchase I’m learning. Especially blogpost like this one are extremely helpful for me.
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Thx for the support. As long as we learn, we advance.
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I have felt similar lately – watching markets go higher and wanting to ‘turbo charge’ my returns. Then I realise I’m deviating from my system. So I decided to read Irrational Exuberance as a counter-point to my greedy self. It was very helpful! You have a system that works for you, that’s half the battle. Win the war by sticking to your system!
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Sounds like a great book to read!
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I don’t fully agree that a proper system can’t be tweaked or optimized. Can’t blame you for trying. And good to know we aren’t the only ones to make mistakes 😉
I think the biggest lesson is not that you shouldn’t try and improve things, but to know what and when to do it (within reasonable terms). In your particular case your tweaks weren’t making the deals any better, so you’ve turned it around 🙂 We can only learn by making mistakes.
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Thx for the positive note
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Ah greed, that and fear would be the basic drivers of all markets. To be able to recognize both as an investor is a huge advantage. Having been an adviser for 25 years I have seen them both change a clients behavior dramatically.(and not for the better!) An incredibly valuable lesson you have taught yourself. And glad you shared it. Regards Adrian
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O yes, i have it mainly with the leverage level for the construction. 2x leverage is chosen because then I could survive a drop up until 50%. but had i gone for 4x leverage last year and this year i would have been financially free by the January next year … Of course at 4x leverage a 25% drop would wipe me out. At the moment it is not a problem as most stocks are expensive so now I actually want to decrease the leverage I already have. But with the next drop the greedy part is going to pull very hard to increase the leverage.
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I feel your pain 😉 No big losses just yet, but certainly some uncomfortable positions with options trading…..
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You really make it seem so easy with your presentation however I in finding this topic to be really something which I believe I’d never understand. It sort of feels too complex and extremely huge for me. I’m having a look ahead to your next put up, I will try to get the dangle of it!
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