Trading Memories, Part 1

With the passion I have for trading, I remember many seminal events in my trading career. These memories run along the spectrum of the best wins to the most awful losses. I remember things that happened years ago with pinpoint accuracy, not because I like to reminisce over past glories or failures, rather these are embedded in my memory bank so I do not make the same mental mistakes twice.

Let’s face it: trading is so much a mental game. We can overthink a situation to the point where we can talk ourselves out of a trade, feel regret and then end up breaking our rules – we know what always happens henceforth.

When I think about my biggest trading blunders and wins it reminds me to be humble, accepting and disciplined. Some of the stories in my trading career range from spectacular to downright silly. My goal is not just about winning and increasing my profit/loss, rather it’s about survival. I want to be around the for the long term, and as an options trader my abilities, instincts and moves are critical for success.

Make one or two bad moves and I could be sidelined for a very long time. Therefore, let’s remember the good and the bad stuff that happens, learn from every situation and become better. I will share a horror story in part one of a multi-part series. Don’t worry, there are good ones to come, too!

The Day Google Flushed Me Down the Toilet

I had accumulated a large amount of Google call options (a very big bullish bet) one Spring day in 2006, feeling rather confident the stock would rise sharply. The value in long options was up to about 30K in these call options, some different strikes and expiration dates (before weekly options were expanded as they are today), and with no put protection whatsoever. The markets were rising, Google was a very strong stock and I didn’t need to waste money buying insurance, right? It had a tremendous growth rate and institutions were piling into the stock. At the time, Google was not far off its all time highs.

I started trading from home a few years prior and ran a couple of investment newsletter services from Bigtrends. I was refining my technical analysis skills and working through my options education, experimenting along the way. My results were decent and back then the market was very forgiving to any mistakes. I was not ‘all in’ with Google or the markets, I had plenty of cash (learned the ‘all in’ lesson the painful way — next article).

So, that morning about 25 minutes into the trading day mother nature called. My kids had just left for school and I am alone in the house. I leave my desk to take care of my business, my computer open of course. Google was flat on the day, my other positions were not doing much and the market was slightly up. I come back about ten minutes to look in horror on my screen – my Google position is DOWN 25K! I was in shock! At the time, this was about 60% of my trading capital. It had to be a mistake, right? I look carefully to see what could be wrong.

Nothing on CNBC, but then all the sudden there it is: The CFO of Google is saying at a conference ‘the growth rate of Google cannot stay like this forever’. And just like that, Google plunged about 30 bucks a share, nearly 10%. It moved down another 10 bucks just minutes later. The spread on my calls was so wide a semi truck could fit through it, so I couldn’t get out of them at a decent price even if I tried. At this point, there was no reason to ‘double down’ and pile onto an unfortunate trade. I just had to sit there and witness the horror of this nasty move.

Did Google just drop this much while I was sitting on the throne? I was beside myself when I saw the red in my account balance. It had to be the most expensive bathroom break in the history of mankind. This had not happened to my account since 2001 (story for next time) and never before did I experience this pain with options. Needless to say, there was a profanity-laced tirade immediately (it was a good thing my young children were out of the house).

My call options continued to drop sharply for days as you could imagine. How could my timing be so bad? Was it karma? Murphy’s Law? Was this a sign of things to come, maybe I should not be trading options? I was so confident, but at this point completely devastated. Days later, I had to eat it and sold my calls for a big loss as the stock was not going to recover to my strike – decay was going to work against me. It would take months to recover these losses, and you know I established a rule – never hit the toilet without having some protection in the portfolio.

While you may think the lesson here is to not walk away from your desk (maybe we need to invent the portable potty for traders?), the important points are not to be too aggressive, do not oversize trades and always protect positions no matter how big or small. This is a story I remember and share often with others as a reminder that when nature calls, the markets won’t wait for you!