I will make this post free. I will discuss why I trade options and how I developed my strategy over the longer-term, and yes my strategy was developed from losing money trading.
I originally started trading options when I was probably 19 years old, I may have told a fib on my options application I had to fill out for Fidelity, cannot confirm nor deny that. I was not active on Twitter at the time and I only traded options on names I knew. I had a smaller account, like anyone else at the age of 19 and I traded weekly options because that was all I could "afford" premium wise. Let me tell you, I did not even know what Delta, Gamma, Theta, Vega was at the time. All I knew was I would buy a call because I thought the stock price would increase, and buy a put if I thought the stock price will decrease.
Yeah, I had some nice winners. The rush was fun, euphoric most describe it, but the losses hurt the most. Eventually I just shredded my $5k account to nothing and had a few hundred dollars sitting in it. Fast forward, I turned 20 and in undergrad, we actually had a derivatives course (here is the photo of the book below if anyone is interested)...
...and in that course we had to manually calculate the formulas on our tests and I thought this was an amazing way to learn. We mostly just covered the basic strategies, it was nothing too in depth. Now I was able to take what I learned in the class and apply it to my trading account so I worked the summer and build back up my trading account (mind you, yes I was still heavily investing in my Roth IRA which has the CAGR of 27.28% since April 30th, 2014) that was my focus, but trading was fun!
I found myself somewhat more profitable, but still had losses because I lacked risk management. I would let my options go -60%, -80% and buy more because I thought my analysis at the time was good enough. It was crap, actually looking back on it I am embarrassed and I have been revising my trading strategy ever since. I was still buying shorter-term, but moved out maybe two to three weeks. Still getting burned.
Fast forward again to my first job out of college as an analyst at a boutique firm, I worked under someone who had extensive experience with derivatives in their professional career and I learned 20x as much as I did in school and traded options there, as well as in my PA. May 2020 I left and went on my own, and I continued to trade. What was the common theme in losing I found myself in?
Time. My mindset was always circulating around the dollar amount in my account, and how I could "only afford the weekly" options. I have strategized mixing my swing trading strategy (technicals, fundamental news flow), coupled with options 2-3 months out at a time that are preferably ATM or ITM (at the money, in the money)... rarely do I trade OTM anymore (out the money).
Instead of "moonshot" trades, I am content with 35%, 45%, 55% gains on each trade. For risk management purposes, I try to close within -30% (sometimes I let it ride out longer depending on the time frame, Apple I was recently down 50% at one point, but I had such high conviction coupled with the large-tech rotation I thought was coming that I kept adding and it paid off, although a 17% gain, the $ value was large). Below are the average returns 2021 YTD of the trades, gains and losses. Members get the dollar values and trades I enter and close coupled with the long-term research I follow on names.
I only trade names I fundamentally follow, I believe coupling the two together can really give you an edge in your trading. I do trade for a living now, and I do have potential capital lined up to manage within the next two years so I suppose I will have to get the Series 65 which should be relatively easy. Take that right after I finish my MBA in Business Analytics, pretty sure I am done in May with that.
I did not become profitable trading options until the last three years straight, I hope I leave you with some food for thought about your own personal trading strategy and what may work for you. Time works both ways, sometimes there are no trade set ups and you have to sit on your hands. This is still the toughest part I find myself in, I just love trading. I always tell people NOT to force trade set ups, monitor closely and then execute when everything aligns.
Pay up for time
Trade like you would swing the stock for 2-3 months
Trade what you fundamentally know
Focus on risk mitigation, coupled with timeframe
Use less technical indicators, maybe four max
Follow news flow and fundamentals closely