My social experiment - Thoughts on Trading

[Matt]

This week I started a social experiment by trading options. I wanted to see how I reacted to fast, leveraged trades.

As many of you know, my investment philosophy does focus on broad, diversified funds, often in the form of ETFs. I do like to lean 'tilts' onto these based on macro economic factors including interest rates and business cycles. The reason for this is that I believe people lean too much on the market to produce results that should instead be found from earnings (salary, self employment etc). I think there is too much risk, and that this is also a distraction from the earning. IE if you get too actively into trading, you lose sight of the earning route as you worry about squeezing profit out of pennies.

My experiment was to see how I would react, and get a glimpse into the mind of people who are trading. My trades were intentionally high risk (but at affordable loss levels) in order to pressure me further.

First Impressions:

• I found that I had much higher emotional attachment to my positions. Even though a 'trade' may only be valued at $300-$500 I would watch the results of it several times during the day. Several of my trades required a movement based upon earnings that came in after the close of the market, so I intentionally held positions into this time. I'd find myself hunting for news to see if I was right or not. Contrast that with not looking at the price of the broader markets that held a considerably larger amount of money.
• I made some mistakes. All of my trades were correct, but I didn't plan the exit correctly. One of these sold out lower than it should have due to using a stop loss rather than a stop loss limit (TPLM).

Trades that I made:

• Shorted Apple on the news that Apple watch sold out.
• Shorted Alcatel (ALU) on the news that they were selling assets yesterday (bought a put when the stock was up 11%) (bought $5 Puts)
• Long on Intel (INTC) going into earnings.

The last two I hold open positions on, I also have an order in the pipeline that is seeking to sell ALU $4.50 puts at a limit of $0.45. Pre market moves indicate that the price will be cheap... so I attempted to cancel the order. It is listed as pending.





The ALU trade was my hope to create a transaction as follows:

1. Buy $5 puts for $0.45
2. Sell $4.50 puts for $0.45

Meaning that I am sitting on a free position (excluding trading costs) and meaning that I can lose nothing on the trade, and gain a maximum of $500. It was good at the time, as I was expecting a smaller move, but pre market suggests that the stock is down 15.42% pre market, around $4.17. That gives 33 cents of intrinsic value to the $4.50 puts on sale, making them too cheap.

Again- this causes stress.

I woke up and checked these stock prices, something that I wouldn't do normally, and when I saw my trade was better than expected I tried to cancel it. I had to remember to log in and find exposure like this, and try to back out of the transaction. Now I have stress wondering if it will cancel before someone snaps up the trade...

I believe that stress is something that you don't often notice, and the distraction that it creates is very real. I plan to continue to explore trading like this to find if there are ways to reduce the distraction it causes.

 

[plane2port]

A couple of thing you could do with your ETF's:

1. Sell puts on ETF's you would like to own.
2. Sell covered calls on positions you already have.

Not as glamorous as what you outlined above, but you could still generate some income with options without as much stress.

And hopefully do it in a tax-advantaged account. The record keeping otherwise is onerous.