Happy new year 2021!
2020 – what a year it has been. Who would have expected that a virus could cause a pandemic on a global scale. Personally, I certainly didn’t expect that I was locked down at home for months. To me, it is a blessing in disguise. Managed to spend some quality time with the family and more importantly, I actually picked up a new skill – options trading.
How did it start?
I have never traded any US option prior to April 2020. In Malaysia, we have something similar i.e the warrants (issued by the companies) / structured warrants (issued by the investment banks). However, these instruments are no way near in comparison to the US options which are more superior in terms of liquidity / directional strategies / sectors / choices / breadth / etc.
I always aim to be a global investor (shifting away from a home bias syndrome). In April 2020 (during the lockdown), I decided to open my first account with Saxo (a Denmark-based brokerage house primarily owned by China-Geely) after coming across some introductory video on Saxo by Dr Nazri Khan (one of the so-called local Malaysian “stock gurus”). Upon activation of this new Saxo brokerage account, it was an instant ‘fall-in-love-at-first-sight’ with the US market in view of its immense range of investable securities. You literally can trade everything under the sky.
After 1-2 weeks, I realised it was not ‘cheap’ to trade the US market for two specific reasons (i) Currency differential: US vs Ringgit (4 times more); (ii) US stocks do trade at very high stock price if compared to the Malaysian stocks. To make reasonable sense, perhaps you need a minimum initial capital of at least USD100K to trade US stocks in a more cost efficient manner. However, I do not have the luxury of USD100K as initial capital. Alternatively, one may consider to trade options which may not require huge capital outlay (if compared to trading stocks).
At first, I was quite reluctant to trade options. My presumption about options is that they are risky in nature. Huge leverage instrument. When the option expires, it may be worthless. Relatively difficult for me to accept options, as I started my investing experience from a value investor perspective (i.e we wait to extract value and in most cases, we do not have the expiry term in value investing). In fact, I was burnt big time trying out the Malaysian warrants / structured warrants. After some deliberation, I decided to long some options using the Saxo platform. At that time, I didn’t have the right strategy, ended up blowing up on most of my options positions.
I decided to take a more serious effort in educating myself about options. Thank God, I came across a very good website, Option Alpha. It has free comprehensive learning materials about learning how to trade the options. More importantly, Kirk is an excellent teacher. Super clear and concise. After attending substantially most of the learning materials posted on OptionAlpha, I realised that Saxo may not be a conducive platform to undertake options trading (some features are not available). For options trading, Kirk mentioned that most people used the two preferred US-brokers – e.g TD Ameritrade’s ThinkOrSwim and Tastyworks. I decided to open an account with Tastyworks as it does not or has less minimum deposit requirements if compared to ThinkOrSwim.
It is important to note that Tastyworks has an educational financial network called Tastytrade. Strongly recommend this channel for 3 reasons :- (i) free; (ii) lots of trading ideas, useful research and educational materials; (iii) opportunity to mirror some trades done by the show experts. Ever since I discovered Tastytrade, I have been closely following the experts’ guidance / advice.
What has happened in 2020?
I would love to say “I think i got this”, with a clear goal and aspiration to be able to maintain consistency throughout my options trading career. With a very small account (less than USD2.6K and an average deployment of approximately USD1.6K), from 30 June 2020 till 31 December 2020, I managed to complete 70 positions (with a win rate of about 85.5%). As of 31 December 2020, there are 15 open positions.
Frankly, any small account is not efficient. Commission would have eroded much of the trading profits. Since then, I had decided to make additional deposits into my Tastyworks account to top up to just above USD5K. Personally, I feel that the conducive investable capital amount should be at least USD20K. Depending on VIX level, one should not deploy more than 60-65% of investable capital at one time.
What will happen in 2021?
I have existing iron condors positions (less than 29D DTE) that need to be managed carefully. Some of them blew past my short positions (e.g China-stocks – high IV rank). If I am not able to manage them for a profit, I will manage them for a loss to be not more than 2% of my investable capital USD5K.
I will continue to build my Tastyworks trading account to reach my conducive target capital of USD20K. With bigger capital, I can explore (i) undefined risk strategies (e.g strangle) ; (ii) wider spread and (iii) higher delta positions.
I just bought a new mic. Hence I may try to post an introductory video on how I trade options soon.
In summary, why do I consider trading options?
- Small initial outlay for a good leverage
- Can bet on 3 directions – Long, Short, Neutral
- Can sell or buy premium depending on IV Rank / IV
- Active management of winners & losers
- Wide range of possible option strategies and defined / undefined risks
- Options are available on most liquid underlying
- Flexible DTE / expiry
- You will love trading options if you have a mathematical mindset
- Probability game & IV reversion – probably the edge of options trading?
Stay safe, stay healthy and happy trading! Happy new year again!
Disclaimer: This is not an investment / trading advice or endorsement. Please refer to the general disclaimer of this blog. If in doubt, please consult your licensed financial planner / adviser.