The Secrets of my Success Part 6. Greeks

When I first started trading options, all I wanted to do was to take advantage of my newly found insights into the markets, using the Elliott wave. Now I wonder how much of my initial success was beginners luck, but the fact is that buying calls alone during the internet revolution provided me with returns others would dream of, even when the Nasdaq was up 85% in 1998-1999. In those days, we divided the markets into new economy and old economy stocks. Imagine what it would have been like for some people who bought SUNW at well above $100/share now less than $4. Or Yahoo, I remember the stock hitting $415 in Jan 1999, when less than a month prior I had bought ATM Feb call when the stock was $190/share. I remember kicking myself for having sold ½ the position half way up.

In those days what mattered was how to take the best advantage of the move “you knew” was about to happen, and beat not the S&P, but the Nasdaq composite. Buying YHOO calls in those days was not cheap. But I could not care less. I was DELTA hungry, without even knowing it I such terms. I did have a sixth sense to anticipate the move. I also had a feel for how getting in when the trend had already begun was very dangerous, but I did not understand that when a stock got on fire, Vega was causing the unreasonable pricing of the options in the high fliers. When AMZN in June 1998 broke out from $41 to $51 in less than 7 trading days after a stock split, I remember saying “it is too late now. Eventually, I did trade AMZN at much higher prices, and probably with much higher Vega. I got sloppy, but it did not matter. AMZN, like YHOO, went up still, even with no earnings to report, just revenue increases. It seems that my ignorance of the Greeks turned out to be a blessing, until finally the bubble burst.

I think that my decision to trade options, instead of stocks, was wise. I would be otherwise still under water if not completely out with a big loss. A few losses in a row on my Call option trading, followed by some others on the put side convinced me that I could no longer trade this way. I was missing something. Buying puts was not an easy way to make money as I had anticipated. My “insightful” Elliott wave analysis was much more complicated when stocks began to decline. Why? IV’s were already too high when the market began to decline. I could no longer hope to buy high IV and sell higher IV. Puts were not nearly as forgiving as the calls had been just a few months before. I was confronted with Vega, and I did not understand it. Corrections, according to Elliott wave theory, are not as predictable as impulse waves, so by late 2000, I was out. I would think I was more fortunate than most. I knew when my trading was not working, and at least my use of options limited my risk. I had recognized the leverage and risk management power of options. I needed to learn more. I needed to understand the Greeks.

And I did. Today, my form of trading deals directly with the problems of 2000. I understand expensive options (high IV), and how strong a move is needed for me to make money. I understand the effect of time decay. I make the Greeks work for me. Not just Theta, or Delta or Vega, separately, but all in one single trade. Only when all of the Greeks fail me do I lose money in a trade. What a concept! Knowledge is power indeed. My metaphor of the three horses pulling a carriage is perfect. When one of the horses tires, the other two may pick up the slack. Only when they all tire will my carriage stop. I remember when the metaphor came to me. It was clarity that brought a smile to my face, understanding that from there on, I had the preparation. All I needed was the opportunity.