WHAT IVE LEARNED ABOUT OPTIONS IS....

 Its time for a post.

The start of the year I started off hot. Market hot, crazy moves everywhere. I was capitalizing and seeing good gains, all while still learning what I need to be doing with regards not only to options, but to swing trading itself.

This past week+ since I got back from my honeymoon, trades have not been going well.

I have been catching some great wins, but ultimately giving back 60-70% of max P/L on majority of my wins. My average in Feb is capturing 37% of the total move, and even worse this past week its only been 31% with days as low as 15%. 

 The market obviously has a new theme with these major downgaps but before these gaps were happening, my breakout trades were getting stuffed HARD. Take a look at EGHT, MMYT, any EV name, CBAT, plenty of others. Breakouts simply would not carry over into next day or two.

So i got killed on a lot of overnight holds. I would be up 5/6/7R on day 1 of the breakout, then the overnight would gap lower and kill the trades and ultimately id only be up 2/3R on the trade total, and in the worst case scenarios, id lose 4/5R. 

My biggest losses this past couple months have come from these gaps lower.

Things just not doing what they were last month. I adapted, but not well enough. I add too much risk at end of day on trades with wide spread, bad option volume. Wouldnt take enough off at 1st profit target, giving back 60/70% of entire move as I stop out next day.

It started with COTY. 1st day back trading after honeymoon I was taking some FAT losses. WAY too big for return from vacation. Several more than -1R trades to make it even worse.

COTY had earnings next day and a big technical pattern and relative strength. I was thinking this can be a big win. Well It didnt do anything positive for me day of entry, just held around original entry, that reason alone is enough to lighten up before the close ESPECIALLY day before earnings.

It gapped lower 15% and I lost 7R on the trade with size. I still have not recovered that loss yet.

Perhaps its a mental thing. Subconsciously I think 'I need to make this back.' And I dont trade with a clean mind.

I have taken steps to make sure im doing better everyday. Learning new mistakes and what to avoid doing. Ive got 15 sticky notes on my monitor of rules and things to keep in mind. And usually when they get to that many, thats when its time to clean my act up.

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I shut my tradervue sub off because I wanted to spend time gathering meaningful data as I was still new to it and wanting to get a big chunk of trades to look at to get some decent averages. I flipped it back on today.

Good numbers. January made sure of that. Feb has been much worse. 

-Best trades come from right at the open.

-Options price more than 5$ I am not making money on.

     -Majority of $$ made from under 2$

     -2$-5$ not far behind

-Performance is best on 20+ Contracts

    -Im certain that means options are cheap priced under 2$ allowing me to get bigger with tight spread

I have now discovered Tradervue is not as good a took for options as it is stock. Wont give me charts nor R data so glad I keep my own.

Own stats

-I keep track of a lot of things. On D chart, stats relative to risk, option variables, 'feeling,' rating option volume/spread. 

Winning trades

(Cannot for the life of me find out why the 1st 10 trades wont show up)

- -.45R MAE (nothing new, wins work immediately)

- +8.1R MFE Avg

- +.72cents

Of my 84 winning trades

    -21 never negative (25%)

            -Avg +7R MFE

            -+3R

     -A little more than half my wins only went max -.4R against me. That means if a trade is at -.4R, it is unlikely to be a win. 

    -Win rate drops dramatically after -.4MAE

        -Im interpreting this as, 'If a trade reaches -.4MAE, its still has a 50/50 shot at being a win.' 

                                            -'If a trade reaches -.8MAE, it has a 24% chance at being a win.'

-My wins seem to top out around 8R. It is unlikely if it does reach that point, it will get any higher.

    -This is a reason/way for my to prevent giving too much back.

More often than not, I am simply risking the spread. So literally a tick against me already puts me at -.5R in some cases, and 2 ticks would be my stop. In some cases thats just how the option trades. A question I need an answer to, is is it worth it to trade those options at all?

-I calculated an interesting stat. I looked at all winning trades that reached +1R and divided by all trades that reached +1R. When a trade reaches +1R it had a 70% chance to stay a winner. This is my cut breakeven point. Trades that reached +2R at 89% and 3R at 92%. This can be seen in losses chart. 

    -This doesnt mean that a +3R trade cant turn into a loss, but it does mean that I need to prevent it from being one and lock it in. 

-Oddly enough these are almost the same data I found when I traded stock as well. Same deal, +3R lock it in at +1R, +2R, lock it in a above breakeven, +1R, cut breakeven. 

-My wins, other than giving back too much gains, arent really my concern, its doing better with my losses. Lets see.

Losing Trades

of 177 losing trades

    -5 reached +3R

        If a trade reaches +3R, it does not become a loser.

    -9 reached +2R

        Same thing.

    -34 reached +1R

        That means 19% (1/5) of my losing trades are reaching at least +1R

        That is 20% of losses, or 34 trades, or 13% of my trades in total that I could/should be adding money to my account. Theres a decent chunk in there. Not to mention those 34 trades added up to -5k in losses that could be at a MINIMUM reduced to breakeven. New rule to be made here. 

    -150 trades were at least positive

        Means 116 losing trades did not reach +1R. Majority of my losses (65%) come from trades that dont really get anywhere. 

THOUGHTS

These are some good results here. Clear things to work with

For starters it seems like any trade that I take that reaches the same risk I took on it, is more likely to be a winner.

Majority of my losses are coming from trades that dont do anything / hover under +1R.

Biggest losses are coming from overnight gaps on options with terrible price action/wide spreads/low volume. 

Management rules for locking in wins are clear. 

My selection is good. My risk management is slacking. Simple fix is size down and anticipate more spread and slippage. Me not trading 5$+ options will eliminate the majority of that problem. 

There are simply sometimes I am not going to be able to get my way out of a -1R loss. Some options just trade that way and that is the risk I take. When it comes to the much thicker traded ones, then I can worry about dealing with -.5R losses or cutting them sooner to save some money. Otherwise I am ok with my risk. 

PROBLEMS

-Getting shaken out at open on retests lower.

-Need to get better at taking singles, and keeping doubles/triples from becoming singles. 

-Forced trades on hard to read market.

-Not anticipating correct risk. <<Problem #1

    -Comes from the widespread options.

    -Not predicting open PA well enough

    -Chasing

    -Overnight holds on lesser quality trades

-Holding overnight on stocks barely acting bullish

    -And on stocks with wide spread and low vol.

RULES/SOLUTIONS

-Options priced above 5$ have to be A+ or it is an avoid. 

-Overnight holds only allows on stocks that are winners, NOT barely holding above level, and has tight spread with decent volume. If not, cut trade off, or reduce dramatically.

-+1R stop breakeven

-+2R stop positive/breakeven

+3R stop at +1R

+6R stop at +3R

+10R stop at +5R

-All else, let it run. Let PA take you out.

-These are swing trades. Have to let open play out and wait for pullback. Every dip has been bought and more often than not the trades that I am holding overnight have strong bullish context. More reasons to buy the dip than to get scared and get out. 

    -At open, 1st drop sets new stop. 

    -If doesnt recover soon may move it up.

-At -.4R the trade becomes a 'look to cut sooner trade.' If possible. 

    -50%WR on all trades that hit -.4R

    -75% WR on all trades never negative, -.1R/-.2R-/.3R

     

So we have covered trade management and what I need to focus on keeping my wins as wins. Covered overnight holds and when not to do it. Found what type of options I trade best. Found great numbers about how my expectations can change as the trade develops. Where my trades tend to top out out. Where they tend to bottom out at. 

This review mainly was about settling myself down. Finding the probabilities. Managing expectations. Feeling good. Selection is there and now even better with option selection. Risk is improving. Management now should really improve.