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IamA Entrepreneur/Investor and I turned a $100k investment into $2.5 million in January. AMA!

Feb 28th 2018 by stevebmmm • 14 Questions • 34 Points

I am an entrepreneur, investor, and author who got into active trading near the end of 2016. I am not a financial advisor and any answers I give are my personal opinion and not a recommendation to buy/sell anything.

Proof & TLDR: Bought ~$100,000 of worth of options based on the S&P 500 in late November through December, betting the whole market would go up fast in Q1. It did, and I was able to sell a bunch before February came and wiped out the value of the remaining options (*options trading is extremely risky, I can't stress that enough). Total profit, ~$2,500,000. (I can send mods an account statement if requested.)

I've been posting in a trading sub-reddit about this investment since late November/December, when I bought $100,000 worth of SPX call options. Essentially, these options are a bet the stock market as a whole will go up quickly - and if it doesn't, the options become worthless.

Why I bought a crazy amount of S&P-based options: Congress passed a bill slashing corporate tax rates in December. The last time corporate taxes were reduced so much was back in 1986. So I looked at how the market reacted at the beginning of 1987 and saw a huge spike in the S&P 500 in the first quarter.

I wanted to bet the market would react in a similar fashion. If I just bought stock, I’d make maybe a 10 to 15% return on investment if I was right, so I went with options instead. An option is basically the right to buy stock at a certain price at a certain date in the future. If the price of the stock goes up and is worth more than the agreed price of the option (called the strike price), you get to pocket the difference. Now when you buy options, if the strike price is well above the current price you can get them super cheap - because the odds of the price going up that much in a limited time are slim.

I looked through various strike prices for options expiring in Jan-Mar and modeled which ones would have the highest payouts if Jan 2018 was a repeat of Jan 1987. I also ran a few more conservative scenarios and bought options at those inflection points as well. Many of these options were so far above the current value of the market at the time they were selling for under a dollar. With volatility so low a melt up wasn’t being priced in at all so I put in every dollar I was comfortable losing.

January turned out to be the best first month of the year for the market in more than two decades. The value of the options skyrocketed, some by as much as 5000%.

I was excited and terrified for the same reasons I bought options and not futures or heavily margined shares in the first place. Going back to 1987, there was eventually a large crash (Black Monday) that wiped out most of the gains for that year. I also knew we were currently going through one of the largest stretches of market history without a substantial pullback. I was pretty sure the market was going to go up and fast, but it was like a game of hot potato to lock in gains before a major correction happened.

With that in mind I actively sold off chunks of the investment as it went up in January. Since I didn’t know if or when a correction would happen, I wanted to make sure I locked in as much profit as possible.

I was still holding the bag on a bunch of these options when Feb came and wiped them out, taking a large amount of paper gains with them. Still, I’d managed to sell enough in January to lock in two and a half million dollars from a $100k investment.

Alright Reddit, AMA! (And again, I can't stress enough how risky of an investment this is, so don't try this at home)

Q:

What is your educational background and past work experience that tought you to do this?

A:

High school diploma. I taught myself online marketing and turned that into a career that gave me enough cushion to start investing.

As far as learning how to invest, making mistakes and losing money was probably the best teacher.


Q:

What career did you make that gave you that cushion? In my opinion the cushion is the hardest part.

A:

It absolutely is. I job-hopped through several startups, making my way from administrative assistant to paid search marketing manager in a couple years. I was managing a $30-$40 million dollar budget and eventually realized I could be doing the same thing working for myself instead.


Q:

¿Hablas Español?

A:

Un poquito.

No really that's about it.


Q:

how much did you lose before

A:

lost ~$40k in 2016


Q:

Do you typically trade Spx options as opposed to others? Or did the tax bill situation just call for them because of their reflectiveness of the impact?

I know very little about options so pardon if it’s a bad question

Also you mentioned learning about options via losing 40k a couple years ago. What was the call/put on? Feel free to elaborate as little or as much

A:

I use SPX whenever I want to bet on the market as a whole. I prefer it to SPY.

As far as that $40k in 2016, I was betting on the election. I thought Trump had a better chance to win than the polls showed, and that the market would initially tank and then recover. I bought puts with the intention of turning them around and going long shortly after the election.

He won and stock futures went into free-fall. I went to bed very late that night patting myself on the back and thinking I'd just made a ton of money.

The recovery happened before the market even opened the next day and my puts ended up being worthless.

However, with that in mind I felt a lot better about selling these options on the way up and locking in profits.


Q:

Thanks for the response

So despite loosing that 40k it’s sounds like you almost made a ton. You were just unlucky that overnight the market recovered. Point being you were already at least moderately educated about options. So I guess before that how did you learn your way around?

A:

I'm very entrepreneurial-minded and I learn by doing. I'll read enough to get core concepts, then try a small test, then read some more.

I can tell you the first thing to learn about options is they usually expire worthless and buying options for speculating is generally like playing casino games against the house.


Q:

[deleted]

A:

I was hitting refresh every 30 seconds from Thanksgiving through February.

I check a bunch, but if I just want to see a ticker real quick I'll bring up Marketwatch.


Q:

How did you get into investing?

What tips/books would you recommend to beginners? I'm 24 and saved up a few $$$$s.

A:

I mentioned it in another comment, but working on your income first is the most important thing you can do. Not only is it a cushion but you can make more money investing if you have more to invest.

In the meantime, I'd go the Intelligent Investor route - boring and diversified - until your income is at a place where it makes sense to invest more actively.


Q:

The tax law changes that your based your bet on are going to reduce your tax liability on the gains from your trade...delicious, isn't it?

A:

It's a 2% drop in the top rate but yeah, definitely not going to complain about it.


Q:

You will probably realize 1.5m net after tax. If you invest it in a portfolio made of 70% equities and 30% bonds, you could easily live off the returns of your portfolio. 5% net return a year is 75k dollars. 4% net return a year is 60k dollars. 3% net return a year is 45k dollars.

If you were in the middle scenario, do you think that spending half of the profits and reinvesting the other half is a good strategy?

Also do you think that you could spend half of the profits only when you make a positive return (and no spending otherwise) is a good strategy over time?

If you start spending, it will be gone in 1 to 5 years. Whereas a disciplined approach can give you permanent peace of mind for the rest of your life. I read you are very young (36). Your life is long.

These 1.5m could well be 3m in 10 years if you do the right thing. And 6m in 20 years (when you will be 56, still young)...

A:

I've got other revenue streams so I hopefully won't need to touch it. I'll probably take a small slice just to have fun with in the short term but most of it is getting reinvested and put back to work.


Q:

How did you decide on going in $100k? Certain % of net worth? I always have trouble determining the "right" amount of an option to buy when I think I have a great idea but know it could be a huge loss very quickly.

A:

It was a little more than 10% of my trading account, plus I kinda saw it as house money as it was part of what I made trading NVDA options last year.

The right amount for an option is what you'd be comfortable losing 100% of.


Q:

How do you feel?

Will your life change?

A:

Well I can finally sleep again since I closed these out.

As far as life changing, not really besides more peace of mind. I'll keep living off other income and eventually put most of this in safer, passive investments.


Q:

Were you born @wsb?

A:

Not born there, but it's the whole nature vs. nurture argument.


Q:

Any thoughts on biotechnology companies? Do you have any action? Lots of money flowing in and out of this sector. $EDIT $CRSP $SGMO

A:

Lot of money being made in biotech but it's not my wheelhouse. For me, there are too many unpredictable variables like clinical trials, government approvals and potential regulations. Of course, someone smarter than me might do very well in the sector.