It is no secret among my group of friends that I was a terrible trader.
For many years, the joke was always on me.
I had opened a trading account with $100,000 back in 2005, and by the time 2016 rolled around, I had about $50,000 left over.
The account would have been better served simply in a CD or money market, but because I was surrounded by traders all day, every day, I thought I could do it too.
Turns out, I was completely wrong.
My trading didn’t have a major impact on me financially, but it did competitively.
I looked around at the guys around me that were successful, and more than anything else, their success and my failure irritated me.
In no other aspect of my life did I ever lag behind anyone.
In sports, I was always successful.
Even in my profession, I was pretty successful.
So why was trading such a struggle?
It was pretty obvious after some soul searching, that I had absolutely no idea what I was doing.
I never took a class, never studied, and I never did an ounce of research.
I had set myself for failure – plain and simple.
Once I realized there was no chance for success, I became introspective.
What did I need to do, in order to achieve success?
My next step was to go out into the world and look around.
There are countless trading techniques and tons of gurus who claim they have the magic formula.
I knew I was an options trader in my heart.
Option traders are a unique bunch.
We do things our own way.
We get to control massive amounts of stock, with a low amount of risk.
I had failed pretty miserably buying options, and speculating.
That was something I didn’t want to do again.
So I looked into selling options.
Selling options seemed to be a great place to look.
In my earliest research, and even in my experience, selling covered calls had always worked out.
So, I started looking at doing more of that.
As an aside, I am also a gold bug.
So around November of last year, I went ahead and bought myself 4,000 shares of NUGT, which is a highly leveraged ETF tracking gold miners.
It was trading around $9 a share, but based on the world, it seemed pretty obvious things were headed downhill and gold would benefit from that volatility.
It turned out I was kind of right and kind of wrong.
All the NUGT trade had in it was volatility, no real upward momentum. Just a lot of price movement between support and resistance.
Now that I was studying one particular stock, I was started to learn how to read a chart.
And now, there are people out there who are called CMTs, and they are an odd bunch.
These are guys who read charts for a living, and in my experience, it’s a bit of a hokey field.
If you read charts for a living, don’t take this personally but I think it is like tarot cards or tea leaves.
But, if you watch one particular stock chart, you can learn the personality of the traders who are trading that one stock, and the chart becomes a roadmap.
So back to selling the covered calls.
On November 15, 2016, and after doing tons of studying that one particular stock, I wrote my first batch of calls – 40 NUGT Calls @ 10 Exp 12/16/16 for $1.30 a contract.
40 multiplied by $1.30 = $5,160 in premium I collected, which would have expired a month.
So now I own the stock, I have sold the calls that set to expire in about 30 days.
If the stock goes above $10, it is called from me which means I need to sell it.
If the stock stays below $10, the trade will expire worthlessly and I get to keep the premium I collected.
However, the stock can move around a lot in 30 days and I know it.
So now I have options. (pardon the pun)
This is pretty good time to discuss how I learned options are priced.
There is a very complicated formula that I could show here, but I am going to break it down based on how I learned to understand options pricing.
Options pricing is a mix of time, stock price, and volatility.
The higher the volatility in the stock itself, the more expensive the premium.
The closer you are to the expiration, the more rapidly you lose the premium relative to the time left.
This is time decay and when you buy an option, time decay is your enemy.
However, when you sell an option, time decay is your friend.
It can be explained better by thinking of that minute timer filled with sand you used to play board games growing up.
When you were stuck on a question, the closer the sands were to the end, the quicker they seemed to drop.
When you are the seller of the option, that’s a great feeling.
When you are the buyer, it’s a terrible feeling.
So now that analogy has been trashed by yours truly, back to the trade.
On the NUGT trade, I sold 40 contracts and collected $5,160 in premium.
Literally the next trading day, NUGT took a hit, and option contracts that I had sold, dropped to $1.00.
Again I had some choices.
I could wait around to collect the full $5,160 or… I could buy back (Buy to Close) the 40 contracts for a $.30 profit.
That’s what I did, and I took a $1,100 win, in just a few minutes of trading.
It was a complete and utter life-changing trade.
I have now made close to 80 trades like this over the last year, for a profit of almost $45,000.
Over the next few days, I will show you how I have made more trades, and how you can learn exactly what I do and how I do it.
— The Option Specialist