trader’s journal

Position: XOM April 2008 $100.00 Call
Size: 4 percent*
Opened: 10/31/2007
Closed: 04/20/2008
Profit (Loss): (100%)

trade thesis

Federal Reserve Chairman Ben Bernanke was dropping interest rates like they were hot. Every time he opened his burrito hole, the dollar tanked and the price of oil jumped. Expecting more rate cuts from Easy Ben, while his counterpart in Europe kept interest rates steady, I speculated the bull market in oil would continue and took a bullish position in Exxonmobil (XOM).

mistakes, flashes of brilliance, and lessons learned

While my thesis turned out to be correct both in direction and time frame, the price of XOM did not follow the price of oil and the call expired worthless. In retorospect, the correct trade would have been to take a position in oil, either through futures, an ETF, or options on either of the former. Better money management would have mitigated the loss - I should have closed out while the call still had some value, instead of stubbornly believing I was correct and XOM would cross the strike price.

request for input from the peanut gallery

I still don’t understand why XOM did not follow the price of oil - can anyone enlighten me as to why this went horribly wrong? Taking a 100 percent loss on the trade stung, does anyone have money management tips to share?

notes

* of total account equity.

While Sharebuilder has offered online trading for some time, they have only recently begun allowing customers to trade options. As of this writing, level two options trading is the highest level available.

As options trading is relatively new on Sharebuilder, the platform leaves plenty to be desired. Sharebuilder is not recommended as an options trading platform. However, for long term investors, the ability to hedge using options or leverage existing positions through covered calls is both welcome and useful.

experience with the platform

I have used Sharebuilder since 2000 and made less than 200 trades.

the good

Sharebuilder’s core business is providing low cost trades that allow investors to incrementally build positions over time. Essentially, Sharebuilder extends the concept of a dividend reinvestment plan (DRIP) to all stocks. A strength of the platform is the convenience over traditional DRIPs - one account can be used to build positions in many stocks and real time trades can be used to close positions. The platform is very good for investors just starting out with limited capital, but a steady income and plenty of time.

the ugly

Because of Sharebuilder’s roots as a DRIP on steroids, its features are not focused on short term trading. Options are inherently short term trades, as they expire in six months or less. The following shortcomings make Sharebuilder unacceptable for trading options:

• No charting tools whatsoever, these are needed for technical analysis;
• Greeks are unavailable and neither is a pricing model; and
• No real time quotes.

shots at redemption

While writing this review, I received an email stating real time quotes will be available beginning in mid November. This will make the platform significantly better for options trading, but still does not address the lack of charting tools and a pricing model. This review will be updated as Sharebuilder adds features in the future.

Position: CSX May 2008 $40.00 Put
Size: 6 percent*
Opened: 10/16/2007
Closed: 03/17/2008
Profit (Loss): (76%)

trade thesis

Despite jawboning by prominent economists, I suspected the United States was in a recession and certainly headed towards one. Because freight companies are often impacted first by a downturn, I figured shorting them would pay off. Additionally, based on my fundamental analysis of freight railroads, CSX Transportation (CSX) performed poorly on several key measures compared with its competitors.

mistakes, flashes of brilliance, and lessons learned

This was my first trade at Optionsxpress and also my first money losing option trade. Key issues resulting in the loss were my lack of understanding of technical analysis, volatility, and money management, along with a limited knowledge of the effect of time decay.

Even though economic reports during the holding period were generally negative, the CSX share price never dropped below the strike price of the option. However, there were a few opportunities to take a modest profit, notably November 21st through the 26th, and later on January 8th.

Instead of closing out the position when it was profitable at those points, I chose to hold with the expectation the option would soon be in the money. Instead, CSX rallied off the lows. I closed the position two months prior to expiration, while the option still had some time value, for a loss of 76 percent.

While the initial trade thesis turned out to be incorrect, knowledge of technical analysis would have helped me choose better entry and exit points, increasing the probability of profit. An understanding of how volatility affects options pricing would have also provided insight to entry and exit points, again increasing the my chances of profiting. Better money management would have resulted in a smaller loss.

request for input from the peanut gallery

What would you have done differently? Was the initial trade thesis correct? If so, how could this be traded in the future?

notes

* of total account equity.

Hello, my name is Trader Vic and I’m a new options trader. To celebrate successfully surviving my first year and turning a profit, I started this trading journal. The primary purpose is for me to remember what I traded, why I traded it, and how the trade worked out. However, I will also include book reviews, market commentary, thoughts on trading platforms, and other items I feel like writing about.

in the beginning

Sometime in 2007 I noticed Sharebuilder was offering options trading. Not knowing anything about options, I assumed they were a scam dreamed up by Wall Street to lighten my wallet, so I ignored the advertisements.

Around mid-summer, Casey Serin made the front page of MSN as the world’s most hated blogger. Through the same article, I stumbled across Housing Panic, where the author mentioned he was short Countrywide (CFC) using puts.

Having discovered what options were good for, I read the disclosures and was approved for level two options trading at Sharebuilder. With only the knowledge that options were volatile and 90 percent expired worthless, I promptly began speculating.

At the time, the now infamous sub-prime crisis began to hit the mainstream media. I focused my speculation on firms that wrote sub-prime mortgages and liar’s loans, as well as banks and brokers with large amounts of level three (i.e. marked to myth) assets. Trader’s Journal will ignore this period, because while I did well, I attribute it mostly to luck, with a minor dash of skill.

moving forward

In the fall of 2007 I had outgrown Sharebuilder’s limited options trading capability and went looking for a better platform. After reading several reviews of trading platforms, I settled on Optionsxpress. This is the point where Trader’s Journal starts.

Using the educational tools provided by Optionsxpress, I learned a bit more about options. I also read a few books, some of which were useful and some not so much. Along the way, I also discovered some amazingly useful web sites. However, I think the best way to learn is to trade with a limited stake (i.e. an amount one can afford to lose) of real money.

disclaimers

All journal entries are posted after I have closed out the positions. As this web log is a hobby, the amount of time between closing a position and the subsequent journal entry is variable and can be quite long.

This site is intended for entertainment purposes only. No content on this site should be construed as a recommendation to buy, hold, or sell any security, future, or derivative. At any given time, authors may or may not hold a position in securities discussed on this site and are not required to disclose such positions.

For privacy purposes, position sizes and amounts will be reported in percentage terms.