Wednesday, May 17, 2023 | By:  Freewavemaker, LLC

There is an old saying that goes like this:

I often have to think of this when I am day-trading my options.  I think a lot of people that attempt to invest in the stock market have a tendency to worry about it too much and eventually that worry drives fear and fear drives them out of the stock market.  They are simply afraid of losing money.  In fact, people fear the loss of money in the market more than they anticipate the potential for gain in the market and take peace in the fact that they could be better off investing in the market than by not investing in the market. 

I am not saying a person should not feel the emotion of fear.  The emotion of fear can certainly save lives as well as money.  Psychologist will tell you that fear drives a “fight” or “flight” response.  But I tend to disagree.  Have you ever been so afraid, or known of someone so afraid, that they could not scream, fight or run … they simply freeze as though time, itself, stands still?  If you have never been this afraid then you have not been to war or come close to a really bad automobile accident.  So, I say fear can cause “fight,” “flight,” or “freeze” reactions in human beings.

However, you should only let fear cause these three actions when it comes to life or bodily harm.  When it comes to investing in the market … It’s only money people!

You are not going to be hurt physically, or even die, if you lose it all.  You will live another day to make more. 

Prior to my retirement I was in the investment business and I helped many learn to deal with the “fear of loss.”  I once had a very wealthy client tell me, “Jerry, I could give all the money it took me 40 years to accumulate to the homeless on the streets today – within 5 years I’d have it all back and even more.”

I asked him why he didn’t since that would certainly help the homeless. 

His response: “No it would not help them at all.  You can teach a man to fish and feed him for a lifetime or you can give him a fish and feed him for a day.”

You see, making money becomes habitual over time.  Many rich people files for bankruptcy and within in just a few years they are rich again.  I am certain you’ve heard the phrase – “the rich get richer and the poor get poorer!”  Well, it is true.  But why is it true?  It’s because the rich have a habit of attaining wealth and the poor have a habit of not attaining wealth. 

Going to college and having a 6-figure income is not going to help someone attain wealth if they fear investing what they earn.  Sure, Colleges and Universities can teach people how to make money and give them the skill necessary to make good investments … but they can’t, or don’t, teach people how to corral the fear that seems to embrace them the first time they take a monetary loss.  They don’t teach people how to put fear of loss on their side as an ally.  They don’t teach people that what they may lose is only money and money can be gotten back rather quickly once you’ve learned to work through the fears of obtaining it.

When I was helping people manage their money for a living, I could not do certain things very easily.  Most of my clients simply invested in stocks or mutual funds and let the market do to the investments what it was going to do.  The company I represented frowned on “timing the market” or investing too heavily in options – as these were moves that were too “risky” for their average client.  And, to be honest, treating a client’s assets (and I had 300 clients on average) the way I treat mine would be way too time-consuming for one person to do.  In fact, while I was dealing with 300 clients, I didn’t even have the time to deal with my money more effectively.

Therefore, I am writing this to you as an individual investor.  I think most people should have a financial advisor that they rely on for good financial advice … but at the same time … many should have a small account that they are willing to manage on their own.

However, first things first, they need to learn to deal with Fear and Worry.  You can never get rid of fear and worry … but you can certainly learn to make them work for you and not against you.

Why did I decide to start day trading?

When Covid hit the world and brought the economic system to its knees I was about 100% invested.  In a matter of months, because our government listened to the CDC and the World Health Organization – rather than common sense – in a matter of months my investments were down more than $450,000.

Below is a weekly chart of the S&P 500 index going back 5 years from today:

As you can see, the market (as measured by the S&P 500) fell almost 32% in a month and about a week.  It then took another 5 months to get back to where it started from on February 10^th.  Unfortunately, many of my options had already expired worthless by then, while stocks I hold for the most part (not all of them) did come back to February values. 

Well, I got to thinking, “With this much of a loss I could end up in the poor house if I don’t go back to work and generate some money.”  I’d promised my wife (and myself) that I’d never be broke again.  What kind of part-time jobs could an old man find. 

I was offered a position at the golf course as “Cart Boy” for $7.25 per hour and 30 hours per week.  WOW, a whopping $217.50 per week for sweating in the hot sun.  Not worth it even though they offered me all the free golf I wanted.  It only cost $1,300 per year to play at my club and that is all the golf I want – with cart!

Then, I thought, perhaps a convenience store clerk or even a “greeter at Walmart.”  No Way!  With my attitude, I’d be fired the first day.

Then it hit me … “Hey Dummy, why not start day trading a portion of your capital that you hold in cash?”  Even though I knew very little about day trading I know that I’ve always been a quick learner so I decided to learn. 

I did not buy or read a book.  I didn’t even watch a lot of You Tube Videos.  I knew that I could invest money over a long period … I just had to find a way to invest it over a short period.  I’d always heard that 90% of day traders lose money and quit – and I knew this could be me … but not likely since I never invest more than I can afford to lose in any one holding anyhow.  Also, I learned years ago how to turn fear into a friend to help me achieve any non-life-threatening goal I come up with.

I knew just four things …

1. I needed to have a goal that was realistic ($500 to $1,000 per day profit);
2. I needed to have a plan to achieve the goal and the plan needs to change as conditions warrant;
3. I was going to make mistakes and suffer some failures;
4. I needed to learn from those failures and keep moving forward.

Most people that have a plan think of it as being in concrete and never changing it as conditions warrant change.  And they also tend to never learn from mistakes but continuously make the same ones over and over again.

My journey:

So, I began with an account that held $38,729.46 in cash and started my journey on 12/20/2022 (That’s 102 “trading” days ago as of today).

Now the next several graphics you will see will be a day by day, week by week, play of what has actually occurred in my day trading account.

By the end of this first week, I was on cloud nine.  I’d managed to gain 25.33% or $9,811.47. My average daily income was $1,962.29 well above my target goal of $500 to $1,000 and my hourly rate was $301.89 (based on the market being open 6.5 hours per day or 32.5 hours per week) which is far better than minimum wage.

Week two was a little bit different story.  Reality set in:

Whoa now … a loss of $7,452.35 in one day and $3,899.20 for the entire week.  Not Good!  But it did not cause enough fear or worry to make me quit on my trading – Even though it cost me about $119.98 per hour to have the opportunity to trade.

By the 3^rd week things were looking good again …

I had five positive days – all above goal and a very nice week.  My account was back up over 37% in value after three weeks and things were looking pretty good.

Week 4:

Yes, I had a couple of bad days, but not bad enough to wreck the entire week.  With a 47% gain in asset value and still earning over $100 per hour … I was quite happy.

Week 5 and 6 was even better …

I had 10 positive days in a row and by the end of the 6^th week had moved my account to a profit level of 92% and was back to earning close to $300 per hour.  However, you will notice there was 3 days in that two weeks that I did not achieve my goal of $500 to $1,000 per day.  But it does not mean I didn’t try.

Weeks 7 and 8:

Again, there were some great days and some not-so-great days … 3 days out of 10 I did not achieve my goal and 2 days out of that 10, I went totally negative.  However, I still had positive returns for each of the two weeks.  Notice also that I’d hit a 112.9% return on the 39^th day of trading.  Not shabby people … not shabby at all.

Week 9 was a disaster …

Three losing days in a row is hard to overcome.  I was down $3,249.68 over all for the week (minus 3.98%) and at a negative hourly wage.  Not enough to make me run though …

Then lookout on week #10:

Whoa … four pretty good days but one pretty terrible day with over a $25,000 loss in value.  Man, this set the account back some.  From a 106% gain to a 41% gain just like that in one day.  Over a $15,000 loss for the week which worked out to an hourly loss of $471.14.

Did I run, did I fight, or did I freeze?  Most people would have done one or the other!

I fought another week and look what happened on week 11:

In terms of my goal, I had five pretty lousy days in a row ending with another loss on the final day of trading for that week.  However, I was able to grow the account back from a 41% gain on 03/01/2023 to an overall gain of 65.48% by the close of 03/10/2023 … so that can be looked on as a win … not much of a win, but a win none-the-less.

Then there was week 12 …

It started pretty good, but ended very bad.  I achieved my goal 3 out of five days of $500 to $1,000 – but man on the 4^th day I was “almost” ready to throw in the towel – or “the baby out with the bath water.”

What was happening?  Why was I getting double digit negative losses on a short-term trading account?  More on that later!

For now, let’s look at weeks 13, 14 and 15:

As you can see in that 3-week period I was able to pull the account value from a 28.6% return to a 67.2% return even though I had a couple of loss days.  Actually, it was two weeks and four days since the market was closed on Good Friday.  No, the losses on day 68 and 69 did not phase me at all.  I was becoming “hardened” to loss.  It’s all a part of learning.  Remember – If there is no failure there is not going to be much success!

Now for weeks 16 through 19:

I had six days of losses, 13 days of wins (some very slight) and one break-even day.  Over those 4 weeks the portfolio only grew by about 8% or so (from 72.42% to 80.84%).  A stock investor would be happy with that return over four weeks – but this options investor was not.

This brings us to last week and the first three days (almost three days anyhow) of this week.  It is now 2:15 Eastern Time and the market will close at 4:00 Eastern time.  So, there is about one hour and 45 minutes remaining for trading today.

Last week was decent, not great, but at least I did do better than $1,000 per day in profit.  So far this week I am also surpassing my goal of $500 to $1,000 per day.  And the real good news is that account is back up over 106% gain in the past 102 trading days or 20.5 weeks.

Yesterday was fantastic since I was at a golf tournament from 8:00 AM till about 2:40 PM Central time.  I got home just 20 minutes before the market closed and saw that I’d sold out of enough options (automatically) that I was able to make $1,090.11.  Not bad for a day of golf.

But let’s focus on today for a moment:  Here is a list of my options that closed today showing my cost, total proceeds received, realized dollars gained, and realized percentage gained.  It also shows when I bought and sold them.

The first one was held less than 1 hour.  The second one was held for a little over 2 hours.  The 3^rd and the 4^th were held less than an hour.  The fifth was held a few minutes more than 1 hour. The 6^th was held about an hour and five minutes.  The 8^th was actually purchased on the 11^th and had gone down in value.  I was able to get out of today for a small profit. 

On the SPY 05/26/2023 411 C you will see a Multiple in the Acquired/Open Date column.  This is because I bought 1 contract on 05/15/2023 and the other 2 this morning.

Most of the rest were held for just a couple of hours.

Total gains today, $2,767.67 as of the market close!

If we look at just the capital invested and proceeds received for today’s closing of options, we see the following:

• Capital Invested = $9.830.10
• Proceeds Received = $12,597.77
• Total Profit = $2,767.67
• Total Return on Invested Capital = 28.16% in one day.

So, what’s the reason for the double-digit losses?

Well, the other side of FEAR is GREED. I’ve told you time and time again that Fear and Greed are what really drives the markets.  Michael Douglas as Gordon Gekko in the movie Wallstreet said, “Greed, for lack of a better word, is good.” 

Even Warren Buffet said, “Act greedy when others are fearful.”

When you think about investments … think this way: “Pigs get fed to get fat.  Hogs who are fat get slaughtered.”  It’s okay to be a pig but not okay to be a hog.

In each of the cases where I’ve had double digit losses I’ve been “HOGGISH.”  I was either trying to reduce a couple hundred-dollar loss and hanging on, thinking it would go back up, till it became an $900 to $1,000 loss (or let an option I’d invested money into expire worthless), Or, I was buying the option when the stock was at a high price and watching it fall without getting out of the option for a smaller loss.  Stupid mistakes, really!

The best way to day trade … I am learning … is to keep the number of holdings small and try to be in and out of them in the same day (or no more than 2 to 3 days).  The longer you hold them the harder the Greek known as “Theta” takes over and the stock really has to explode to get you back to even.  Just because the option is “In the Money” (stock price higher than strike price) does not mean you are in the money.  You could be very much out of the money. 

For example … look at this option on IWM that is set to expire this Friday (and I purchased this one more than a week ago).

The strike price is $175 and the stock price is $176.21 (or $1.21 in the money).  However, look at the P/L columns.  I’m down $241.32 or 38.59% — even though this option today is up $303 or 374.07%.  It is not up far enough for me to get back to even.  I will probably close this one out tomorrow (one day before expiration) so that I don’t have to purchase 300 shares of the stock at $175 per share when it expires on Friday.

The bottom line …

A lot of good money can be made part-time day trading (and that’s far better than holding down a part time job at minimum wage).  But you must first of all have a goal as to what you want to do with the day trading (income, gains, etc.).  Second, develop a plan to help you achieve the goal and change the plan as conditions warrant.  Third, understand you are going to have some losses … some failures … that may make you fearful.  Fourth, learn to harness that fear and put it on your side by learning from these mistakes and failures.

The really cool part about this is that you don’t have to start with over $30,000 to do it.  You can start with a small sum of say $1,000 – $5,000 and do just fine.  You may not be able to generate $500 to $1,000 per day … but even $50 to $100 per day would do far better than most part time jobs.  Of course, as the account grows so does the daily income (as long as you reinvest gains back into the account).

My longer term goals?

Take this account to $1 million dollars in the next three years.  All I need is a return of 133% per year from this point forward and it appears that I am well on my way … unless I get HOGGISH too many times.

Is it possible?  Well, I am coming back to the article on 05/24/2023 – 7 calendar days after starting it (actually 5 trading days) and take a look what has happened:

So yes, as long as I don’t do too many STUPID things, I think it is very possible to attain a 133% return per year going forward considering that in about a third of a year I’m already up almost 125%.

And the great thing is that you can do it too, if you will just get fear and worry out of the way and take time to make it happen.  Learn to live in a “Yes I can Environment” and not a “No I can’t Environment.” Learn to be a VICTOR and not a VICTIM of circumstances.

Have a great investment journey and remember: 

You can’t row the boat without “making waves” and if you are not rowing the boat, you are likely only drifting where the currents take you!