Stay Away From Options

Stay away from options, unless you’ve studied and understand how to trade them.  In my case, I know enough to be dangerous.  I know it can be used to leverage, to hedge, and speculate, but I don’t know much about valuation, volatility measures, greeks, and time erosion.   If I can’t even trade successfully with common stocks, I don’t even have a chance succeeding in trading options.  Not only do I need to be on the right side of the market, my timing has to be right as well.   Most of the options expires worthless, and truly 99% of mine have expired worthless.  Why tempt the incredibly bad odds?

I know options can be used to bet against a stock better than shorting the common shares.  One benefit is that, unlike shorting the common, the loss is limited to the premiums paid for the put contracts.  I was betting on AAPL making a correction and I bought Feb 350 puts.  Look at the chart, it began to show a sign of retreat 2 days before expiration, and became in the money 1 day after!!   Talked about “a day late”.

I know options can be used to hedge against or insure the common stocks.  I have some AGU common stocks in my IRA, see the chart below.  On Feb 2 (the circled area around 92), the position was having a nice green from 87 but I’d like to hold AGU long term, at least to fill the thin zone.  So I got smart and bought some Mar 85 puts as an insurance.  The problem was, I had a false sense of security.  The stock went all the way to 100, and I was happy. But then it started to sell off, and I stayed put.  It went back up and I was happy again, thinking the put contracts was what kept me in the game.  Then it went crashing down.  As of yesterday, both the the common and the option were red.   Having the put options paralyzed me from taking profit or using stops all together.   It’s amazing in the hindsight how I watched the $1,200 profit evaporate and didn’t think I had to do anything about it.  False sense of security.  When the price went away from the strike price, I should have just forget about the put option.

Options expires and you have to be right before the expiration, and make enough profit to cover the premiums paid.   I bought a SINA Mar 90 call for about $440 around the circled area after some sell off, taking advantage of cheapened call options.   The next day a big gap down immediately tag a big red loss on the position.  A few days later, earning disappointed, and it gapped down again.   My option had lost 90% of its value. And I forgot about it.  Then as the expiration approaches (a week from now), the stock started rallying.  Today’s ago the option miraculously broken even intraday.  I put a limit order to sell but didn’t get it and the stock started to retreat intraday and I was back down to ($100) loss. I was fearful that as expiration was only a week away it may expire worthless.  So I took the ($100) instead of a potential ($440).   Look at it today.  The call option’s bid price is $5.70.  I could have had $130 profit instead of the ($100) loss.   OK, this is after the fact, but the point is, options have many more features that are subject to me humanly weaknesses.  As such, I should try to avoid it, until I can better control my emotions, and understand options better.

Today was scary.  The S&P lost the 50 day MA yesterday and today it gapped down.  It has retraced all the way back to the 50 day MA and then some, but it’s not out of the woods.  The weekend is ahead having Libya and Saudi Arabia putting uncertainty to the oil prices.  Japan had a 8.9 earth quake today, not sure what the ramification is.  My portfolio was down to $137,800 intraday today before it bounced back a bit.

Today off the bat I screwed by the stop run with the AMR trade, even though AMR had a tight spread, the market maker still managed to screw me.   Check out the eye sore in the chart:

Portfolio Value: $138.200.

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