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The Terrifying World of Options Trading

Talking with my millennial peers, I’m amazed by how many of them are afraid of or uninterested in the stock market. Although majority of them are too young to have lost their shirt in the 2008 collapse, parental influence has likely deterred them from taking interest in one of the greatest wealth-creation engines in the world; the markets. If their excuse isn’t fear based, it’s they think they lack the capital to get started and/or don’t have the time to invest in investing.

Unlike a lot of my friends, I’ve always been mesmerized by the stock market. At first impression, what could be easier than making a living by moving some numbers around on the computer for a few hours a day? My life long dream was to try day trading. My first stock purchase was back in 2001 when I was 14. I was deep into the card game, Magic: The Gathering and decided to spend my allowance buying shares of Hasbro to support the game I loved. My mom took my allowance and bought shares through her broker. It was around 16 dollars a share at the time… fast forward 16 years and it’s worth around 96 dollars a share! Although no one could have predicted Hasbro’s performance, the feeling of supporting a company by investing in it, and then profiting from that investment, has stuck with me into adulthood.

Fast forward to 2015. At this point in my life, I was a regular cube-jockey on the 9-5 grind. I decided to open a trade account with TradeKing (now Ally), and dumped my tax return into it. I knew I wanted to trade and invest, but I had no idea where to start or how to grow my pitiful account. Using the screener and research tools provided by tradeking, I researched as much as I could and eventually came across the website It became my hub for trade ideas and market news. After reading everything I could get my hands on, I started trading cheap biotech stocks. I had a few winners, but mostly losers. My problem was I wanted to trade, not buy and hold and hope for an eventual profit. Call me a degenerate gambler if you must, but day trading is what keeps my focus. I didn’t have access to enough capital to buy and hold a diversified portfolio while trading, so I was constantly buying on news and was often too late to the party to make big gains, then selling for a loss when I saw a new opportunity on the horizon. After losing a lot of money, I knew I had to change my strategy. I eventually stumbled upon an options chain and was as confused as I was intrigued.

Without getting too deep into jargon, options are a financial instrument that derive their value from an underlying asset. Since I’m not an expert in finance, I’m going to use the investopedia explanation:

What is an ‘Option’

An option is a financial derivative that represents a contract sold by one party (the option writer) to another party (the option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date).


Options are extremely versatile securities. Traders use options to speculate, which is a relatively risky practice, while hedgers use options to reduce the risk of holding an asset. In terms of speculation, option buyers and writers have conflicting views regarding the outlook on the performance of an underlying security.

Read more: Option
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Options are a completely different animal compared to stocks. A 1-3% move in the underlying stock could dramatically impact the value of an option. I was instantly addicted to the swings. Unfortunately, even though I had done some research, I was eaten alive. I had a few lucky up swings and a lot of unlucky down swings.

Thank God I never traded using margin or credit; only what little cash I could afford to risk. Although the thought of magnified returns was very tempting, I was smart enough to know I was too inexperienced to deal with that much risk. With every loss came a lesson, and I knew if I kept researching and trying new strategies, I’d eventually improve. Unfortunately, my losses combined with a few of life’s curve-balls caused me to put my dream of day-trading on the back-burner.

Fast forward to 2017. Life eventually calmed down, my bank account continued to grow, and I went back to trading. I made the mistake of jumping at one of the first biotechs I saw running up. Huge mistake; I sold for a loss. Instead of going deeper into biotechs I decided to stick with options. I knew I needed to start somewhere, so I took what little knowledge I had and came up with a plan:

Due to my low account balance, I’m forced to follow the US Pattern Day Trader rules. That means I can only intra-day trade the same security 3 times in a 5 day period until my account has 25k+. It sucks there are no real ways around it, but it helps keep me selective and patient.

To get a better idea of what I’m doing, I started trading SPY options on paper. Eventually, I subscribed to to practice virtual trading. Although it helps, you don’t feel the same rush you get from live trading so it feels more like a chore. I still highly recommend paper trading for novice trader because it provides you with stats you can analyze.

Using technical indicators, primarily MACD and RSI, scouring message boards, and paying attention to the market sentiment, I eventually began making 1 trade a day, 3 days a week. To develop consistency, I came up with a list of rules to help me avoid stupid mistakes:


  • DBG- Don’t be greedy! Know your exit points and stick to them.
  • Be careful when buying options before 3 five min candles have developed. 
  • Never try to catch a “falling knife”
  • Use a stop loss if more than 60% of account is in play.
  • Don’t listen to pumpers/dumpers in media. Try to find the trend for your edge.
  • Watch RSI, MACD, MAs, and/or bollinger bands to help find decent entry/exit points. 
  • Don’t hold options overnight unless expiration is 3+ months.
  • Mostly avoid short term OTM options.
  • Ask yourself, “Would an idiot do this?”
  • Be patient.
  • Don’t Chase; those moves are done and the easy money has already been made.

Scalping spy options, 1 trade a day for 3 days a week for 4 months, I double my account size.  I made a few trades that were home runs and guess what happened? I got cocky, greedy, and started breaking my rules. Instead of sticking to what worked for me, I started trying new strategies and chasing the home-run trades. Within two weeks, I gave back 4 months worth of gains. I was eaten alive, but being a resilient and introspective kind of guy, I knew I needed to pull myself together and go back to basics if I was ever going to make it in this twisted game.

I began researching trading psychology and using order flow as an edge; I recommend Sang lucci/ wallstjesus’ Trader’s Hierarchy of Needs video series for a quick crash course in both. I created spreadsheets to calculate my trading stats to see if I could identify the sticking points that were causing me to lose money. I went back to paper trading a couple times a week. Going back to basics allowed me to get over the tough losses because it helped rebuild my confidence. As soon as I went back to trading off my plan, I started making money again.

Although I don’t necessarily recommend my path to anyone who doesn’t have the desire to trade, I do think it is important for everyone to understand the basics of financial markets. Although the market can giveth and taketh, it is a wealth creation engine. Even if you don’t care about trading, understanding markets and securities can help you invest to meet long term goals or help maximize your 401K. Do yourself a favor and take an interest in putting your money to work. If you do want to trade, I’m proof it is possible to make a small but steady profit with less than 1k in the account. Just find what works for you and stick to it.