I received the following email this morning from a reader who asked to remain anonymous, but thought his story would be a good lesson for many others who are trying to learn how to become better traders.
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First, I had 14K in PUTS I bought and lost 11K the day of the surge. My account balance was $38,000 end-of-May. Today I have just $8,000. I managed to lose 30K in just 3 months! Good for me! No, seriously, this is the case. My wife and I are dealing with the setbacks very well, as I am in the military with good security, and the chance to “do-it-all-over”. Here’s something I want you to twirl in your mind a bit. Because of your family’s new highs of 68.5 with another deposit soon, leading you to deal with seemingly larger sums to play if you can’t find enough plays, think about my case. I was the same way in that when I had the 38K, I didn’t realize HOW MUCH it was, and simply did not diversify and was overloaded in plays. Then, of course, after the first bad play, desperation led me to chase profits back in the riskiest ways. Humans can be so foolish. Well, we both know you have never overloaded, and it seems as though you mentioned putting 25K in a safe place somewhere simply because the overall balance was rising, and you still sold puts.I would have gotten to 50 thousand, which is still half of my overall goal of 100K, if I would have pulled some of “it” aside such as you did, and stuck with the normal sized trading I was used to.
Naturally, you may be shocked that I allowed the prior 3 months experience in options to get me, but it can happen to anyone, and my hands have been burned. So, I’m planning to go back to my original working strategies of owning stocks and writing calls, but again, I will be open to selling puts, and still may even trade options-knowing of course that I have to “win” sometime.So, here is my concept for you. Choose an amount, any amount of the 68K, whether it’s 800 bucks, 8000 dollars, or 18K and do something completely different with it. For example, imagine if I’d just bought a car, or used money down in a house, or financially socked CD’s or zero coupons. None of these things yield the results you are accustomed to or I want either–which is why I guess I didn’t do it, or that the thought didn’t occur to me too well. But for your overall wealth, you don’t need all of it in your trading model anymore. Even if you did a wait-and-see for 6 months with 18K in a CD, and traded the rest, you would feel safer and not have to worry about larger sums in play or having enough plays. Plus, you couldn’t lose the CD in the way I lost the huge sums I did. Think about getting to 100K slower, but guaranteed. Just imagine, if I now have to make 92,000 to get to 100,000 but you need just 30,000. My point is I was at nearly 40,000 3 months ago, and thought 50,000 was a guarantee. Well, it’s still achievable, but obviously at much later dates. As always, my enthusiasm and future hopes remain high, but my curiousity in options and greed, and overall lack of planning has temporarily sabotaged me.
So, if I wasn’t successful lately, at least I can encourage you to make it and do it right. I will start again of course, and don’t worry I’m taking it well. But, as I follow your blog, I don’t want to see you run into any difficulties. Recognize some of your current success for what it is, but avoid doubt. Be careful about changing how or what you do–I changed things in June and it was wrong. Check your greed factor, that I know you have, and ask how willing you are to take even 500 or 1,000 and just go SPLURGE on you and your wife. You deserve it, and it may help you focus on exactly how you want to proceed.
Bottom line, my recommendation is go spend something “wasteful” financially but practically beneficial on your family, then consider what you can ADD to your wealth plan, such as doing a zero coupon bond, or pulling some of it aside for the real estate you mentioned before. Diversity doesn’t have to be just in your put plays. Even if you didn’t profit as much as fast in near term, WHEN YOU HIT 100,000 you would be so happy. It won’t be long because you see how quickly the balances can rise when you do your model well. But, please, make the goal without the worry and pressure hassles I just went through. Being wise isn’t easy, being foolish is very easy. I would never have enjoyed your blog in April if I didn’t respect your story and your judgement. So I know you can take today’s story with a grain of salt and make your own choices.
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This is a great (sad) story of how easy it is to get carried away with options. These are my take-aways/lessons learned:
1. When buying options, use a small portion of your account. The percentage gains/losses can be so big the majority of your account is not needed. Just last week Kadena commented about a 20% gain he made in a few days. With gains like that, small positions is all it takes to beat the indexes.
2. Avoid desperate moves. Reacting to a loss by taking a bigger risk is a recipe for disaster. It’s best to step back, figure out what went wrong and start over.
3. When learning a new trading strategy, ease your way into it. What worked for this trader at first backfired on him as his trades got bigger. Had he practiced his trading model for a longer “grace” period before putting so much of his portfolio into it, he might have learned how quickly options can turn against you just as easily as they can make a year’s worth of gains for you in a week.
4. It takes a big person to admit when he makes such a big mistake and a very smart person to learn from it as this trader did. My compliments to him for learning from it and sharing his story with us.
Other thoughts/clarification:
1. I have been overloaded like he says he did, but I did it when my account balance was under $10k and I learned not to repeat those mistakes again. I’m certainly not above making big mistakes. I just try not to repeat them.
2. The $25k I wrote about putting in another place is now $30k as I added to it last month. To clarify what I did though was not to withdraw it from my brokerage account, but to use the cash I had for reserves into a money market until I needed it. I still base my puts on having that cash available, I just earn a bigger return on that cash while it sits and waits for me to use it.
3. I also own CDs in another account and keep that 100% seperate from my trading account. We have ~$31k in that account, so we’re actually at the $100k mark now including what we keep in CDs as a cushion for life’s unexpected expenses or lack of jobs. Establishing this safety net was a priority for us before moving to a larger investing account.
4. I don’t withdraw from my investing account for personal use. This account is only there to grow until we diversify into real estate or I’m unemployed and need the income from my trades and that’s only after we use up our cash in CDs from the other account. I would not consider using this trading account for buying a car or other household item.
5. We plan to buy a car next year, but after we hit the $100k mark in our investing account. I’m not looking at any “treats” for myself before then. I’m so cheap that when I buy a Coke with my lunch I feel I’ve treated myself.
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