No. of Recommendations: 1
Les,

I agree. It was a clumsily done trade that might lose money. But I put the trade on, because I was willing to pay to see what would happen, as in, I've never sold a call before, and I wasn't sure IB would execute the trade for me. (I'm long some calls and LEAPS. So I knew I was good on that side on the market.)

Yes, ERF is a POS stock that screamed DANGER! The dividend was way too high to be sustainable, and its industry is in trouble. In short, I wanted to see if I could use junk stocks to create synthetic bonds, and I needed to get my feet wet somewhere, and ERF (and PSEC, which I'm also long, but seemed inadvisable to sell a call against) seemed as good a places as any to begin. And now that I have some actual positions on, the readings on options I'm doing make a lot more sense than just sitting in an audience at some Money Show somewhere, listening to a CBOE rep gives a very polished presentation on how to use options. (I've been to many of them, given by the best, but always is was MYGO, amd the stuff just didn't stick.)

"Learning by doing" is what works best for me, and I insist on making my own mistakes. I need to have skin in the game, so that my mistakes hurt financially (but not too much) and so my questions become focused, like, "What did I do wrong? and "How do I get myself out of this mess?" OTOH, if that stock goes to zero, my loss would be less than 20bps of AUM, and I'll be out long before then. So only tiny, tiny money is being put at risk. But it is real money, and the trades are being done in real time. So there's no pretending about what kind of fills I'm getting or retrospectively saying "woulda/coulda/shouda". The trade is on, or it isn't, and it's going to work, or it isn't, and then I do one of my usual, careful post-mortums to figure out why.

About a thousand trades ago, I bought my first corporate bond. I can still remember how scared I was, almost to the point of vomiting. It was TXU back in the days when it was rated Baa1/A-. The position worked, so I put on another with a different issuer, and pretty soon I was buying real junk, TWA's bonds, and then averaging down on them, but getting away with it, like, I came out of that Chapter 11 filing being made whole by repayment of all accrued-interest and full return of principal. The bank teller's eyes got wide when I deposited my check from that settlement, and she tried to pitch a CD to me, something paying 8% or whatever it was at the time. But I declined, pointing out that I was making 35%.

Retrospectively, my entry into bonds was reckless, foolish, and stupid. I was taking on risks I shouldn't have. But the only way to find out where one's limits are is to push the limits to the max and then back off a notch or two and call that "cruising speed". With options, it's going to be no different. I'm going to push as hard as I can, so I can see if I like the game enough to learn how to do it well, and what I think I'm really after isn't using options as speculative instruments, but using them as hedging tools, which will feed back into what I'm already doing with bonds (which are really just puts).

So, yeah, mistakes are going to get made, and the faster I make them, the faster I can learn how to do this stuff right, or have enough evidence that I really do need to back away. Almost no investor spends on R&D. But that's 2%-5% of my annual budget. If I spend every penny of that, but conclude I don't like the options game, then forever after I've protected the other 95%-98% my assets from that folly. That's a cheap price to pay.

Thanks for your comments.

Charlie
Print the post  

Announcements

When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement