The Option Millionaire
All the way up to that million dollar mark there are smaller goals —if I can just make it to $100k. If I can just reach to “x”. There is a lot of mindset changes in everyday life too, like when I hesitate buying something seemingly minimal, like a few hundred dollars or out to dinner with the girlfriend and looking at getting a bottle of wine I stop and think to myself “I made $5000 today in just a few hours. Get the wine.”
A million dollars isn’t that much money, really. I have a real job and trade options on the side, which is how I’ve accumulated this money. When my account was just starting out I was making big all-in bets on trades, making $17k, $19k in a day a few times but then has some massive loss days too, $10k+ down days. The emotional roller coaster is not to be understated, even when using money you could afford to lose. It’s hard on you 24/7 when you have money on the line, especially in options.
If you have a $15k up day one day and the next day you throw away $10k on a bad trade, I guarantee you won’t think “hey, I still made $5k this week!” Oh no, you will be like “I just lost ten thousand dollars.” When you are clawing for every dollar in trading you don’t get those positive thoughts, trust me.
Now, with a 7-digit balance I’m a lot more conservative. I still only trade options but my goals are more like trying to clear $5k a week rather than hitting a home run every trade. I have a “real” tech day job but don’t count on trading income as anything I can be sure about and I’m not saving it “for” anything in particular, but I’m not spending it either.
So to sort of answer your question, it’s given me both comfort and confidence in life — it doesn’t make me a jerk but it makes me walk through life a little easier knowing that if my real job blew up that I have significant savings I can fall back on if needed.
Another fact — I’ve built this up in just a few years and that’s not common but I’ve never withdrawn from it except to pay taxes. Originally I was doing it to help buy a car. Then I had so much work into it that I didn’t want to spend any of it and it’s just kind of kept going and I’ve never splurged and bought anything using that money. My real job is a great one and I have a very comfortable income from it so I’ve been lucky not to have to struggle but knowing I have that savings sure lowers your stress level in other parts of life.
And I’ve learned not to talk about it with anyone, especially at work or anywhere that jealousy could even possibly come about. Once people know you have a stash they change their opinion of you and rarely for the better. At best, they hound you for market advice and I’m not a financial planner and if you lose money you will resent me, no matter what you say otherwise and what and how I trade isn’t going to map to anything you do with your 401k.
Also, it’s a lifestyle thing and not for everyone — I’m up while it’s still dark in the morning going over the pre-market, wake up in the middle of the night to check futures, etc. it’s not a set it and forget it lifestyle, you have to be on it, every day and able to trade or make emergency trades based on events from anywhere in the world 24/7. I’ve made $40k sitting in the beach in Mexico on my birthday and lost $30k because I was in an important work meeting and couldn’t get free. I’ve had girlfriends leave me because my stress level was through the roof and I wasn’t fun to be around at times.
I’ve mellowed a lot, I still make about 1800 trades a year and I never hold for more than a few days and never putting more than about 15% at risk even though I only trade options. I’m rarely even holding overnight now so usually at the end of the day I’m sitting in all cash and able to walk away. It’s a lonely hobby, I used to socialize more with other traders but I’ve learned that they are more distracting than helpful and pull me off my own trading plan so I tend to do everything in isolation.
I live a nice lifestyle but that’s based on my tech job income, not trading income.
This is not my first go-around, I spent about two years of trading when the market first tanked and lost about $120k due to not managing losses properly, getting emotionally attached to trades, not booking gains fast enough, etc. I almost think you have to blow up once to learn how to play the game.
But again, a million dollars, sadly, is not that much money anymore but it is a great nest egg to give you confidence — not to be a jerk but to know that if you fall, you can coast for awhile. Just don’t tell anyone about what you made.
I learned about options first because they sounded “exotic” but when I read about them they actually seemed pretty straightforward and it was a way to have a lot of leverage — you could hold the equivalent of about $600,000 worth of Apple stock for only about $10k in options. You get the same amount of profit from the movement on your options holding as you would if you held the $600k worth of the actual underlying stock, but of course you can lose that same amount. If you have 10 options contracts at $10/each so you have $10k on the line, assuming they are front-month and implied volatility is low, blah blah, blah (this is just an example), if the stock went up $10 that would be $10k on our 10 contracts, same as if you held 1000 shares of Apple. Of course if the stock goes _down_ $10 your $10k is gone, so it’s high leverage, but it’s not using margin so if you have $10k on the line and lose it on a bad trade, that’s all you lose, no more, but it expires and it’s not alike a stock where you can hold it and maybe in a year it will come back around, the money is gone.
So to sum that up, I went into options because it allowed for much more leveraged positions with defined risk. I read everything I could find on it and “paper traded” for quite a while before using real money. Brokerages like thinkorswim (one I consider the best for options) allows you to open a totally free “paper” account where you can use their trading platform and perform all kinds of share or options trades (or forex, futures, etc) and it’s using “live” data so you can get the hang of trading and practice your stuff without using real money, it’s very cool and an incredibly generous offer by them, worth chasing down if you want to practice and learn.
Everything else just takes time. I have a small basket of stocks that I follow intimately and understand their price movements and behavior to market conditions and use that as my edge in trading them, you learn the “personality” to an extent of an equity and it helps you read the movements. Beyond that I’m almost entirely a “technical trader” — graphs, patterns, candlesticks, etc. You typically have two types of traders, “fundamental” traders, that look at all the financials and products of a company, and “technical” traders, that might be trading of chart data, momentum of a stock, etc.
In any case, don’t rush into it, paper trade for a while until you get the hang of it, no matter how much your practice, when you start using real money things get real, real fast and you get a level of emotion tied up in it that you didn’t have when paper trading carefree.
Other question about funding: In circa 2006–2008 or so I funded with about $30k then went to $75k or so, blew a few big trades and re-funded again, eventually was about $120k-$125k in before blowing that all out as the market collapsed and I held on too long thinking things would turn around and like I said previously, with options there is no “later recovery” — your stuff collapses and expiration comes and it’s over, done and gone.
This run I start with $26k — that is because you need $25k in an account to avoid the “pattern day trader rule” which disallows you to sell an equity (or option) and then re-buy the same thing within a few days. Do that three times and you can get a 90-day (?) restriction on your account where you can only close out positions, can’t open new ones anymore. If you have over $25k you are exempt and $26k allow me a little bit of movement and commissions without dipping under $25k.
Early on, maybe the first 6–8 months I was making big bets, buying up my entire account value worth of options, sometimes on just a single equity but I was hitting big paydays too and it initially built up my account fast but I was willing to lose all that money as well, I went into it with that attitude that this was all money that could be lost and I had to be ok with that, it wasn’t rent money, college money for the kids, etc.
Once I started getting over the maybe $150k or so mark I started to get a little more conservative and I wasn’t buying 1000 straddles anymore or making huge directional bets on a stock, I was being more strategic and trading like I only had $50k, not three times that. I think that is one of the reasons that my losses were kept in check and while the account growth slowed down, I was still consistently profitable and trending up.
The other thing you have to keep in mind as that you will have losses, you just will, it’s a two-steps-forward then one-step-back kind of business, you just have to get really good at money management and cut your losses short and almost as important, let your winners run. There is nothing too wrong with booking profits early but it can be maddening when you close a trade with a nice $5k profit and find that had you been patient and waited just another hour so, could have booked $15k. I’m now pretty good at cutting my losses at the right time and I’m good at seeing a trade start to go against me but knowing it’s worth holding but I still book profits earlier than I should sometimes, I’m just a little conservative and when I have a good gain going and it starts to reverse I’m out with the gain, sometimes you have to have the stomach to ride it out if you think it’s only a blip.
Good question. I only trade weeklies and only fairly deep in the money. I don’t like to have much extrinsic cost as that can melt away on you pretty quickly if the IV drops.
So weekly options only, usually about 4 stops into the money and usually only when there is a fairly tight spread and the options are fairly liquid so I can move in and out of them without much effort or slippage.
The longest I’ll typically hold now is from Friday until Monday, but otherwise more than an overnight or a mid-day hold, ~4 hours or so and I’m getting itchy to see.
Calla and puts, so I’m long or short, no preference, just whatever opportunity comes up, always trying to keep emotion out of it. ☺
Yes, all the momo stocks are the ones I follow — AAPL because it’s the largest option traded equity so there is lots of liquid, TSLA, PCLN, TWTR, YELP (a little), GOOG, etc. It’s been choppy lately, tough market to trade, hopefully it trends one way or another so I’m sitting on my hands quite a bit unless I see a great opportunity.
Email me when The Lone Trader publishes or recommends stories