The writing was on the blog, and that too for last 2 consecutive weeks. I was not respecting my stop losses for last 2 weeks but Nifty was kind enough to let me go. Nifty index 50 got ferocious this time. It punched me in my face and simply kept punching till end of Thursday.
It was not like I did not have a clue about it. Even though I wrote that maybe the market will continue to do nothing, I had a bad feeling on Tuesday morning. Nifty index 50 was breaking out of a key resistance level, meaning that an uptrend was in an offing.
However, an important personal task needed urgent attention. I had almost hit the ‘exit’ button on my call options but then I decided to finish the personal task and exit later. When I came back, the loss was above my stop loss limit. I decided to wait as I had now started believing that ‘wait’ is quite a strategy by itself. Over the last 2 weeks, waiting made everything right.
As per my weekend analysis, I had a notion that Nifty index 50 would not breach 16150. I was holding 16150 CE and decided to wait till Thursday EOD. By Wednesday, the market was near 16300. My unrealized loss was beyond what I could digest. I lost all sense of analysis and was literally in hope mode. I realized my loss on Thursday and officially confirmed myself as an idiot.
This is not new. My wife had warned me about this happening when I decided to dive into this type of trading. I kept assuring her that I have a stop loss system and I will stick to it. Over the last 8 weeks, my wife kept asking me about my stop loss on trades. I kept saying that I had it under control. I obviously did not.
Option selling math is what attracts people to selling options. For example, CME research states that 76.5% of all options held to expiration at the CME from 1997-1999 expired worthless. Then, there is the standard deviation rule i.e. selling strikes beyond 1 standard deviation from current spot price carries approx 33% chance of winning.
But the reality is the story of man whose name is Victor Niederhoffer. The story is a big and heavy read but a must read for any option seller. Then, there is another case of James Corder’s OptionSellers.com whose apology video is really heartbreaking
So if these great traders blew up their accounts by selling naked options, what is the chance of a naïve me making money out of it? If I continue to behave like this, I don’t.
And therefore, I need to behave differently. Here’s how:
- KEEPING A DAMN STOP LOSS ORDER: Until today, I did not keep SL orders because they almost always get triggered. But I need to keep them, perhaps at a level which should ideally be unreachable.
- KEEPING TRACK OF SPOT: There is a way to know when Nifty spot price has reached too close to strike. Even if SL is not triggered, it is ok to exit the position
- KEEPING TRADING CHARTS TIDY: Over the last 2 weeks, I made a mess out of the charts. I casually stated that it is all useful but it never is.
- STUDYING TIMEFRAMES WITH PURPOSE: I do use multiple timeframes to study charts. However, I have found myself to be mixing things up. I need to know which TF to use and how.
My weekly returns from this type of trading cannot compensate for the kind of loss which I took this week. I need to be mindful that I do not become penny wise pound super foolish again. And I have a good feeling that I won’t.