New Option TraderLearning how to be a successful option trader and blogging about it

A photoblog of traders and brokers having a bad day.  Guess I shouldn’t laugh but it did make me laugh.  I’m filing this under Lessons Learned…

Here’s another video for you guys, hope it lightens your mood on the market we’re having these days…

My company has an ESPP plan which (in case you’re not familiar with this term) is a way for employees to buy company stock at a discount — it stands for Employee Stock Purchase Plan.  It’s a great thing because they purchase it at a 15% discount to it’s average price over the time the money has been collected for this purpose.  They purchase the stock twice a year, so in a way it’s also a forced savings account — also a good thing.  So even if all you do is flip the stock, you’re likely to make at least the 15%.  If the stock has risen significantly, then you make more. If it’s dropped significantly then better to hold it for a while.

Fidelity manages this program for my company.  And, being an educated option trader I thought I would sell covered calls or buy protective puts on this stock for a while. You have to apply for option trading at Fidelity but that’s not the problem since I think that’s pretty standard.  They want to make sure you understand the risks and give you the appropriate trading level — I get that.  Selling covered calls is at the lowest level because the calls are covered by the stock you own, hence the term, “covered”  meaning if the stock does hit that price and you ARE forced to sell, you already own the stock so no real risk.

So anyway, I “applied” for option trading using a form which asked about my experience with and understanding of options — which, let’s be honest — even at a beginner level is way beyond what the average person trading options knows.  Most people just wing it by buying calls and puts and don’t ever bother learning about implied volatility, option greeks, or option strategies such as butterflies and iron condors.   Today, I got a letter from Fidelity telling me that I’ve been denied for option trading privileges.  No explanation or details on why or what I need to do to get approved. Seriously?

If I really cared, I’d call them up and try and get it worked out. But, the truth is I only wanted it to sell covered calls on my ESPP stock. I do all my real option trading at Think or Swim.

I’m filing this under “Lessons Learned” because it’s proof that the bigger brokers are completely inept when it comes to options trading and should not be used.  For options trading you need a broker that understands options and has policies and staff in place as well as a superior platform and execution time. Any broker who matches this description would never pull crap like this.  Think or Swim is my first choice but if for whatever reason you’re looking for alternatives, there’s also Tradeking and  OptionsXpress

I’m stepping off my soapbox now…

I just closed a bear put spread on Pulte Homes that I opened in Sept.  My thinking at the time was that the stock was in a freefall and the housing market was not going to make a spectacular comeback in a month.  So, I placed a bearish trade that would be profitable if PHM moved anywhere below 15 and reach it’s maximum profit at 12.  I was sure it would hit 12.  I was wrong.  But, it did go down and that’s all I needed.  For a while there I was sure this was a losing trade and a hard lesson learned.  It may not have gone to 12 but it went low enough and since I had held on until expiration day I had the time value to make up most of the profit.

9/10, Bought Bear Put Spread

BUY 4 PHM OCT 07 15P
SELL 4 PHM OCT 07 12.5P
Debit 0.80
Cost of trade:  $320

10/10, Sold Bear Put Spread

SELL 4 PHM OCT 07 15P
BUY 4 PHM OCT 07 12.5P
Credit 1.15

Credit to account:  $460
Profit:  $140, 43.75%

Wow!  Here’s a trade that I’ve been regretting for weeks now because I was sure I’d lose my whole investment — any my trading account isn’t that big!

Instead, I got 43.75% return.  That’s not bad.

So, what did I learn:

• I didn’t really understand the Bear Put Spread strategy.
• Never trade a strategy I don’t understand.
• Options are great, even a small movement can have a great ROI so better to not be gready holding out for the biggest profit possible.
• I’m not a bear but I still need to work on how to trade like one