Back in the late '70s and early '80s I was one of my brokers most active stock options traders. Over a four year period of time, I learned a lot but was down about $10,000. I considered this the price of an education. I thought that I had it about figured out when in the later part of the fourth year I made back the $10,000 and was up well over $5,000; pretty good.
Then I got hot and saw my net position grow to over $25,000.
Now, you'd think that I had it all scoped out right? Well, not quite... Part of it was blind luck. Par of it was calculated profit taking. And, unfortunately, part of it was riding a storm that was soon to blow itself out.
By this I mean that only part of my profits were fully realized. The other part were active profits in open positions.
I have to confes that my broker and friend, Joe Lawlor, took me aside one day and suggested that I, "...use xyz options as a source of funds...". What Joe was politely telling me was that I should be realistic and take the accumulated profits that I had rather than waiting for some "big hit" that the tipsters were touting.
I, of course, ignored him. Three days later I had lost everything. I lost because I averaged down on options that had a near term expiration. Though the stock recovered, the options did not. I learned that time has an exponential damping effect on option prices.
I lost a lot of money to learn this. I haven't traded options since. After my losses, I surveyed everyone I knew who was trading options or who knew someone who was and discovered that only 2 out of dozens that I learned about made money.
Being a scientist (B.S. Physics and lots of computer experience), I began to write complex analysis programs comparing expiration time, option price, stock price, and current time. I found that there was no way, in the long run, that a person could beat the price degradation that options suffered as time marched toward the expiration date. No way. In fact, the statitics are very similar to that of establishing the odds at a craps table: though the pass line affords you the best odds, in the long run it's still about 1.4% against you.
But 2 people that I heard of had made a lot of money in options. How? Options, as any game of chance, is a zero sum game: to every winner there is a loser. And, as you know if you are a student of the markets, only about 20% of speculators are on the positive side of this equation, and only 2% are significant winners. How is this possible?
How is it possible? That is the question, the challenge, that I post in this rant.
Have you traded options? Have you traded options actively for 2 years or more? Are you significantly ahead?
Let me hear from you if you are. I would also be very interested in learning if those of you who are ahead did so through day or position trading. My experience was 90% on the position side where I would carry the options for days if not weeks. Very little of the trading that I did was day trading, mostly because the commissions ate up day trade level profits. Perhaps today with online trading prices this is different and I should take another look at all of this. Please let me know your thoughts.
Throw me an email at The Number 2 Rant Registery of Fame.