What I Learned From 1 Year of Trading Stock Options
In this video, I cover the 9 biggest takeaways I've learned from my first year trading. I hope these insights help you become more profitable with your trading, as I know they have helped me.
Intro
Now that I’ve spent a little over a year trading the stock market – mostly options – I thought I’d go over the 9 most crucial lessons I’ve learned, and am still working on, so that you can increase your chances of being successful with trading.
Before I dive in, I should note that I do not claim to be an expert with trading. The stock market has been on a crazy bull run and even boring ETFs had some pretty awesome returns last year so just because I had a profitable year doesn’t really mean much. But I believe these takeaways are just good trading practices in general, and I’d rather you learn it here than find out the hard way.
Develop Your Strategy
This first part is tricky because when you’re starting out, your strategy might just be like mine was, which was “I don’t know… I just want to be profitable, I guess?” And that makes sense, because you don’t know what you don’t know and if you’re new to trading, how are you going to have a strategy?
I think it’s best to break it down by first identifying what your personal risk tolerance is and what your schedule allows. If you’re working your full-time job every weekday during market hours, you aren’t going to be able to day trade.
Maybe you want to trade options, but don’t have time to watch the charts and exit at exactly the right time, so in that case, you may find that waiting for a few stocks you are bullish on to come down to your support levels before buying a long-dated call option is a good choice for you.
Or, maybe you don’t like the riskiness of buying options and would rather buy shares outright of companies you like. That’s fine too, but unless you’re planning on holding for 5-10 years, you probably want to establish some rules for yourself.
For me, I’m actually still developing my strategy as I learn more and more what works best for me. Right now, my base strategy is swinging call options with a .3 to .5 delta of large cap stocks with 45-90 days to expiration. This means I buy call options (which is a bullish position), I swing them, which means I hold them at least overnight from maybe a few days to a month or two, and I buy them out of the money, which is a little riskier. The .3 to .5 delta means the options contract will increase in value $30 to $50 dollars for every 1 dollar move the stock makes.
From there, I look to start scaling out of my position at 30% profit. I almost always buy more than one contract at a time, so I may sell two at 30% and hold the others longer. If the stock is looking strong and making new highs, I may continue to hold until it looks like it’s running out of steam.
On the flipside, if a contract never hits 30% profit and instead turns against me, I try to start cutting my losses at around -30%. Sometimes, though, if the entire sector or market is having a red day, I will hold past -30%, expecting it to rebound in the next few days. Since I usually have plenty of time on my contracts, I can give them a chance to move in the right direction before I decide to cut my losses.
And this is why you should develop your own strategy. You may look at mine and think “so you’re risking a lot of money for a 1 to 1 risk reward ratio? That doesn’t sound great.” But the truth of the matter is a lot of my winners go far past 30% because I get good entries by closely watching the charts every day waiting for the right moment to enter. 30% is generally the soonest I look to start taking profit, but if a stock is showing strength, I will continue to hold it for higher returns.
Discipline (Keeping Your Emotions in Check)
Alright, so you have a rough idea of your strategy, now you have to stick with it. Discipline is the hardest aspect of trading and a reason why a lot of people fail. And if we look back at the strategy I just outlined, it’s honestly not very disciplined either, so it’s something I currently struggle with.
An issue I struggle with is I get too attached to a number of my portfolio and on red days, I’ll cut losses just to temporarily stop the bleeding because maybe I feel emotionally attached to being above $30,000 and it’s getting close to dropping below it. Even though I’ve seen my positions end up green after holding through a few red days, sometimes just seeing my account balance start to drop below some arbitrary number is enough to make me make a poor decision. I just did it last week with BIDU, where I had recently entered the position and it was supposed to be a longer-term play, but when the market had a few red days, it had a big impact on my daily profit and loss so I eventually cut it… just to watch it regain its value and then some the next day.
Other ways you can fail here is by taking revenge trades after losing money, chasing hype stocks, and just otherwise not following your own rules. This is where going back at the end of the week or month to analyze your losing trades can be really helpful. Where did you go wrong, and what can you do to avoid it next time? Write your rules down on a sticky note, and put it on your computer monitor if you have to. If you can remove emotions from trading, you’ll be much better off.
Scale In and Out
Another thing to consider is this: scale in and out of your positions. Instead of taking all of your money and dumping it into your favorite stock all at once, try scaling into your position. This applies to both shares and long-dated options contracts. Let’s say you want to buy 100 shares of Apple. If you’ve charted your support and resistance levels like I talked about in this video and feel confident in the company and the market, you don’t need to buy all 100 shares at once. You can start with a smaller position and add to it over time.
The benefit of doing this is it allows for imperfection. If you think you bought the dip and the stock continues to drop, scaling in allows you the opportunity to buy up more at a lower price, lower your cost basis, or the average price of your position. If the price goes up, you can feel more confident in your play and add to it accordingly.
You can see I did this with my GameStop trade. Of course, hindsight would tell you I should’ve just bought all the shares I wanted when the price was the lowest, but trading doesn’t work like that. When the stock started going up, I became more confident in the play and felt good about liquidating other positions to add GameStop shares.
Likewise, when it’s time to sell, you don’t have to sell it all at once. Many times my trades will hit 100% profit, allowing me to sell half of my position and keep the rest of the contracts running risk free. Once again, this allows you to not be perfect with exits all of the time because it’s impossible to nail your entries all of the time. If the stock keeps rising, you’ll still have a piece of the action, and once it levels off or starts selling off, you can close out of your position completely.
Best Trade = No Trade
So many times the best trade you can make is no trade at all. And that sounds like boring boomer advice, but it’s true. If the market is moving choppy without a clear direction, do you really want to enter a trade at that time? Or if you’ve just closed out of a losing trade, it can be tempting to try and earn back that money by making another trade. But this can be a slippery slope and lead to even more losses. Sometimes, the best thing to do is sit on your hands and just watch.
Watch the price action, look at different sectors, and just see how stocks are moving without being in any trade at all.
I see a lot of new traders who feel like they always need to be in a trade, but so many times, the better play is to sit on the sidelines and wait. If you force trades, you’ll break your rules and lose money.
Instead of over-trading, spend time continuing your education. Read articles and blog posts, watch videos, practice charting support and resistance, etc.
Keep It Simple
Another thing you may find yourself doing is loading up your charts with tons of indicators, and that’s totally fine. BUT after you spend some time watching the markets with whatever indicators you load up, get rid of the ones that just add noise and confusion and don’t actually help you with your trading.
Here’s an example of the way my ThinkOrSwim looked when I was starting out. Then, I got rid of all the crap and just drew my own support and resistance, and that was about it. Now, I’ve added some exponential moving averages to my chart, but by default, that’s all. If I am doing quick scalp trades, I do add a few more indicators, but in general, I find a nice clean chart can help you see the things more clearly.
Don’t over-complicate things. There won’t be one magic indicator that will turn trading into a money printer for you. And it will depend on your style of trading, but like I said, if it’s just adding noise and not actually providing you with useful information, get rid of it. Trading can be as simple as you make it.
Bankroll Management
This is a big one, and if you get bankroll management wrong, you can say goodbye to making a long-term profit. I would recommend never risking more than 5% of your account per trade – and ideally more like 2-3%. But of course, I know when starting out with options trading on a small account it’s virtually impossible, unless you implement spreads, which can be confusing for beginners. I get confused by spreads all the time, even when I understand them theoretically.
So I know when I started my main account with $1500, I definitely risked closer to 60% of my account with a single trade, and I knew that going in I could lose it all and I would be okay with that. Definitely don’t put your rent money in the stock market.
If you are risking a larger percentage of your account on a single trade, give yourself a tight stop-loss so you cut your losses before they become too great.
And if you do have profitable trades, I would recommend making withdrawals. Like I showed in my video last week on my profitable trades, I withdrew $40,000 from my Robinhood account almost immediately after a big win because I wanted to preserve that capital and not do something stupid.
Maybe you have a goal of growing a small account to get over the $25,000 mark so you can day trade. In that case, maybe set your withdrawal threshold to take out anything at the end of the week over $40,000. Just an example, but the idea is to secure some profit by getting it out of your regular trading account and into something like a checking or savings account.
Time on Contracts
This next one is for options trading – but maybe the most important lesson I learned is to buy time on contracts. You may be tempted by inexpensive contracts that expire in a few days or a week, but these contracts are extremely risky. Now sure, I will trade some 0 day contracts every once in awhile for a quick scalp, but in general, having a few months on a contract can really go a long way to keeping your account green. They are more expensive, but it does give you more time to be right.
Remember back to my $100k options challenge when I bought a GameStop call expiring on January 15th. If I would’ve bought the same contract, but expiring a month or two later, I may have been more inclined to hold on to the contract and make well over $100,000 on that play.
Keep in mind how theta, or time decay, negatively affects your options contracts. The closer you get to expiration, the faster it will lose its extrinsic value.
So the bottom line: buy time. Maybe it’s 3 months, maybe it’s a year – but give the stock time to move in the right direction so you can close it out for a profit.
Focus
There is a lot of noise on the internet with what stocks are hot, which ones are memeing next, and which SPAC you should be invested in before its too late. And it can be overwhelming. If you’re just starting out, I’d recommend putting together a watchlist of maybe 10-20 of your favorite stocks that you want to trade. Cycle through their charts throughout the day, mark them up, set alerts, and watch the price action play out.
I think it’ll be easier for you to identify setups and really get a good idea of how these stocks move throughout the week so that you can find the best opportunities to trade them.
Once you get more comfortable trading, you can branch out and play whatever you feel like, but I would try to keep your initial watchlist on the smaller side and focus in on those.
Manage Your Positions
Lastly, manage your positions. What does this mean exactly? Well it means 1) don’t let a green trade turn red. Once it hits your price target, start scaling out. 2) Don’t let your losers obliterate you. Close it once it surpasses your stop loss level. And 3) don’t open too many positions. I’ve fallen victim to this last one many times, and sometimes, I still do. But if you have 10 different open plays, you’re going to have a hard time focusing, staying disciplined, and staying profitable. And I’m not talkin about your buy and hold stock portfolio – that’s fine to keep diversified with different positions. But for trading, especially with options, try to keep it between 1-3 plays at a time when you’re starting out. It can be tempting to jump into a play here and play there and take a shotgun approach hoping something hits, but trust me, it’s better to limit your positions. Pick only the most favorable setups to enter. The trades you have the most conviction in. Let the other ones go.
Final Thoughts
Those are my 9 biggest takeaways from my first year of trading and I really hope this helps you with your trading so you can have success. If you’ve got some lessons you’ve learned yourself, I’d love to hear them in the comments. I love hearing advice from more experienced traders because chances are they’ve learned the hard way, so if I can avoid some of their mistakes to increase my profitability, I’m all for it.
Do me a solid and hit the thumbs up button on this video, consider subscribing if you haven’t already, and I will see you in the next one.