This blog is a journal of how I got into options trading, my trades, and how they compare with my other investments. I started this blog on December 21st, 2011, but things really started well before, around April 2011, and even before.
By April 2011, I had an increasing discomfort with how my investments -- mostly mutual funds at Investors Group -- were working out. I had bought the story of how more risk equalled a chance of higher returns, and had long since maxed out my risk. It seemed that was the only thing that I could do, and the only thing my financial advisor put in my control. I had tried other things previously -- an apartment for rent, a quarter share at a hotel -- but my financial advisor had always dissuaded me from it, telling me that no matter how bleak things looked in the market, mutual funds were the surest thing. I wasn't doing much better than the market, if at all.
As the adage goes, when the student is ready, the teacher appears. Around April 2011, I happened to find a set of cassette tapes (yes, actual vintage audio cassettes) of Tony Robbins's Unlimited Power. It reminded me to focus on what I want and to take charge and take action. I decided to focus on my finances. My short-term aim was to get $2000/month in post-tax passive (or very little work) income.
When I pressed my financial advisor about the performance of my portfolio, I got strange and confusing answers and mostly browbeaten into feeling like I was asking for the moon. I started with looking for a new financial advisor. Meanwhile, I looked around for how to make a better return.
I had also found another financial advisor, one at ScotiaMcLeod that my parents had been using. He talked about more active management and being more picky about funds to find better ones. By this time my concept of what risk meant was changing, and conceptually at least he had a better approach, plus access to more funds than just the Investors Group suite. I also gave him access to a line of credit to buy shares or other instruments if he wanted to.
Around July 2011, I found League Assets Corp. They were a REIT (Real Estate Investment Trust) and their performance was (mostly) separate from the stock market. They had been around since 2004 and had been returning ~10% per year, and had never failed to pay what they promised. Their "safest" and highest-yielding for-income investment at the time was 9%/year, with a 7-year commitment, and 5% penalty on the capital invested if you pulled out early.
My earlier experience with real estate investments was a seminar by Edgeworth Properties promising 12.5% per year but with considerable risk. I had looked around but gave up. Finding League and their investments just blew me away -- Why was I in mutual funds for less than 9% per year?
League was still new to me, but I was willing to give it a go. The transfer of funds from Investors Group was complete and I took out a big chunk, about a third, and put it into League. For the first 6 months, there would be an introductory rate of 10%/year, after which one would choose which of their investments to direct the funds.
Still not satisfied with 9%, I kept looking. Now that I knew about REITs, I basically wondered what else I didn't know about.
Around October I met someone who claimed she was making fantastic returns through options trading. She talked about 100%+ returns and how the portfolio she managed was up over 800% year-to-date. I was skeptical but intrigued. I had never looked at the stock market following my father's disastrous forays into penny stocks since pre-2000 resulting in over 100,000 in capital losses that were never recovered. But looking into options... I started to realize that they were predictable positions that could be precalculated.
The person I met started sounding like a Ponzi scheme the way she was talking: Telling me I can't do what she did, yet suggesting that I cash out of my investments to do it; talking about how one of the options would be to join a hedge fund that was using options, yet showing that hedge funds were doing poorly in general; being defensive about any suggestions that she was inviting me to invest with her and giving no details about her portfolio, yet hinting that it might be an option and it'd be a big favour to me as her clients were all millionaires.
I ran for the hills. But I did get myself basic information on options. I tried a couple of dummy trades, then in November 2011 I put in my first live trade. I started out with $5,000 CAD borrowed from a line of credit at Prime +0.5%. Meanwhile, I stopped preauthorized purchases of mutual funds and I discussed with League about pulling out my $43,000. My mutual funds were locked in for 3 years with diminishing penalties. League was not locked in yet but had a 5% withdrawal penalty. My plan was to pull out of League first, then with more successes with Options, slowly take out my mutual funds.
My first live trade didn't work out. I wanted to write a Cash-Secured Put, but QuesTrade wanted to see $25,000 in my account before giving me level 4 options trading permission to write Naked options. That, or I had to short the stock first, which is silly if you actually want to hold the stock.
I had heard that various online brokerages in the US had recognized that a Cash-Secured Put was not really Naked and had changed the permissions accordingly, but this was still not possible in Canada. After some futile looking around, I finally gave up and on my initial 5000 CAD foray into options, I wrote my first Covered Put in December 2011.
