Why I Started Only Trading Options

How I made a 300% return in three months trading options as a complete amateur…and yes I know options are scary.

Everyone has probably heard of Robinhood by now, and those in finance have definitely heard of retail investors. This year has been unprecedented in many ways and in the trading world, retail investors have started making a dent unlike any time before.

If you don’t know what retail investors are, here is the definition from Investopedia: Retail investors are non-professional market participants who generally invest smaller amounts than larger, institutional investors.

So basically, as someone who doesn’t have nearly as much capital as a typical institutional investor, I am a retail investor. With the surge of us retail investors, the market has been extremely volatile and unusual this year. I don’t know much about finance, nor do I know how to seriously take Delta, Theta, Gamma into account. But along with the steady returns I’ve made over the past three months trading options, I’ve learned a few things.

Trading options is not for the faint of heart. It’s a volatility game driven by catalysts. These catalysts are unpredictable and on any given day the value of an option can skyrocket or plummet. But as someone who doesn’t have institutional money, I don’t really find trading stocks to be worth my time. Sure, I have some shares that I don’t really touch- ever. But that’s just passive investing, and I decided that my 401k is a good enough passive investment for me. This year I wanted to be more involved. I wanted to see substantial returns in much smaller time frames than a year, which is typically when I evaluate my regular shares to decide whether or not I want to take profits or leave them for… another year.

So, as someone who was willing to take on much higher risks for much larger and quicker returns, I started dabbling with options trading. The first option I ever bought was a CRSP call with a strike price of $85. I think I made a profit of around $400 in just under a week. After that, I started doing some basic research into how to evaluate stuff like bull flags, candlestick patterns, etc. But, over the next few months I started to realize that stuff really didn’t matter in such a crazy volatile market. I couldn’t rely on traditional methods of evaluating whether or not the sentiment of a stock was bearish or bullish at any given time. The market was acting unpredictably.

The upside here is that the more volatility, the more you can make trading options. That’s not to diminish the fact that you can also lose a lot more as well. But typically, when you trade options you take on the risk for the potential gains and the only way to make incredible gains in short periods of time is with a highly volatile stock. So the state of the market lately has been good news for us retail options traders!

How I took advantage of this:

1. I read as much news as I possibly could every single morning. I created a list of stocks that I would potentially want to buy options for and I watched out for all of the updates relating to each one. This was important because if there was any big news about a company, that news acted as a catalyst for the stock. I didn’t just read about the stocks themselves, I also read about the industries each of them are in. So for example, when it came to PayPal, I read everything about it on Yahoo Finance as well as Bitcoin and Venmo coverage across media outlets even including Reddit. Also using common sense, I stayed up to date on the COVID vaccine trials because the state of the payment industry is tied to where people are spending their money and how. If people aren’t going out and aren’t using cash, that’s generally good news for something like PayPal.
2. I used stop losses. This became extremely important to learn how to use. Like I said, the risk is much higher while trading options and therefore, it’s possible to lose almost all of your money at once. With stop losses, I was able to minimize my losses by determining how much I was willing to lose ahead of time and sticking by it.
3. I only bought options with an expiration date that were at least a month out from my buy date. As risky as trading options already is, it‘s not worth making it even more stressful with a quickly approaching expiration date. I also think it’s silly to by such short expirations in an insanely volatile market. The longer you have an option, the more opportunities there are for consolidation after drops. I didn’t know this right away, I had to learn the hard way. I bought an ETSY call with a 2 week expiration and that did not go well. And guess what, if I had bought that same call with a 2 month expiration, I would’ve been swimming in those profits, but instead I had to take a loss because my option was expiring way too early.
4. I only buy options- either puts or calls, for companies that I actually know about and am familiar with. Trading options can really be equated to gambling when you buy calls for stocks you know nothing about. It’s becoming more and more popular to jump on the growth stocks getting hype on stock meme pages. Sometimes these companies are worth a little gamble because they’re not all a complete shot in the dark, but many times they’re just a pump and dump. It’s not fun getting caught on the wrong side of that.
5. I prioritized covering losses before going all out and holding long on certain options. What I mean by this is, that if I were up 30% (let’s say that’s a profit of $500) on a call and the prior day I had lost an equal amount on a different option, I would sell the call immediately to cover the loss from the other option. This gives me a fresh start. In my opinion, it’s been safer to break even and look for a new opportunity than to hold onto something already up over 25% hoping to squeeze more out of it at the risk of not breaking even if it drops.
6. I held onto options for much longer while they were in the green than while they were in the red. In my opinion, it’s better to just cut a loss as soon as possible rather than waiting it out hoping it’ll recover (this ties into using stop losses). Many people seem to find it difficult to sell at a loss, but trust me sometimes a loss won’t seem small until it’s much bigger. I also find it to be the opposite when an option is in the green. As long as you’re at a profit, you might as well hold it to see how much higher it’ll go.
7. I tried my best to not let my emotions or personal preferences about a stock guide my decision making. Sometimes, you might strongly believe in the future of a certain company only to find that in the short term, there are many unforeseen catalysts involved that hold it down. With options, I found it’s much more about playing the market and less about the company or industry of the stocks. If you want to invest in a company’s long term potential, buy the shares, don’t buy the options. Unless you have the money to buy options two years out from the expiration date.

As I continue my journey, I’m sure there will be a lot more for me to learn, but so far these are the tips I have to share. I myself, used to think of options as something I’d personally never know anything about, let alone think about touching. They’re not as intimidating as they might seem. There’s definitely much more risk involved, but at the end of the day, there’s a good amount of strategy involved too. It’s not all luck, although it’s always good to have some of it on your side. Options have provided me with returns I never would have made trading shares so I hope this encourages you to look into it and learn more!