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I Am A Crappy Options Trader

I got permissions to trade options in my E-Trade account at the end of July, and as the title of this entry suggests, have been doing it badly for about three weeks now. I always brag when I beat the market, so in the interest of full disclosure  I should also  post about my failures.

I am about $400 in the hole right now after 4 trades. I am trying to determine what my mistakes were. (I understand it's possible trading options is itself a mistake, but I'm holding off on that judgment.)

All of my trades have been purchases of puts on DIA, the ETF that tracks the Dow Jones Industrial Average (or DJIA). A put is an option that gives you the right to sell a stock (or ETF) at a specified price. As the price of the security goes down, the value of a put goes up, and purchasing a put is basically a bet against the security. In my case, it was a bet against the Dow.

That's what makes my failure so humiliating. The Dow, until a few days ago, was performing very badly. Most of my problems had more to do with the execution of the trade than in the option I chose to purchase.

My first options trade was to buy 2 contracts (which is 200 options). I spent roughly the same amount of money is spend on a stock. That was my first mistake.Trading options is not the same thing as trading stocks, and you don't need to put nearly as much money in a trade, since options can make huge percentage moves in prices in a single day.

I also put in a stop loss order which was way too tight. Again, I was treating an options trade like it was a stop trade. I got stopped out, and even though the stop was pretty tight, I still lost nearly $300. The Dow kept going down after I was stopped out, so I probably missed out on a potential profit.

I lost a smaller (but not trivial) amount more recently after getting stopped out. I asked similarsmell how he sets stop-loss orders and he said he doesn't.  I wish I had asked him that sooner.

So far I have had one winning trade and three losing trades. I made another trade (again buying puts on DIA, or betting against the Dow)
Tuesday afternoon, and right now it is losing. This time (unlike the other losing trades) I may have just made a bad call (no pun intended).
I am not going to get out now though. The market is very volatile and could very well go back down (thus causing my option to go back up) Tuesday.

I read a a market briefing today  that gave me a small amount of hope that todays performance might have been the result of short squeeze.
This is from briefing.com at  1:00:

The indices are extending their reach to the upside as investors on the wrong side of the tape continued to run for cover. Evidence of today's short squeeze is best reflected in the fact that this year's worst performers are among today's biggest winners.

If this is a short squeeze,it could be over Tuesday morning and my current trade will be in better shape. Time will tell.

Maybe I shouldn't be trading options. I've decided I will allow myself to lose a maximum of $1000. If that happens, I'll know I'm no good at trading options and shouldn't be doing it. Time will tell.