Over the last 8-12 months the stock market has become a more well-known understanding to many young adults. Every social media platform, especially Tik-Tok has been promoting the wrong agenda about the market. Many people are portraying the stock market as a “get rich quick phenomenon.” Or you are guaranteed to make insane returns if you listen to them.
Social media has treated the stock market like a casino, a game, a gamble. If you treat it as such, you will lose your money… GUARANTEED.
Today I will be sharing what happened to me when I was first introduced to the stock market. Spoiler… I lost all my money.
February 2020 is when I first started putting money into the stock market. My intentions were to try and make a side hustle for myself to earn some spending money. Within days I noticed my small $500 would not make any significant money just from buying shares. Then I learned about stock options…It was downhill from here.
I wont fully go over what stock options are because Darnel covered this last week. Essentially, options have potential to 2x, 5x, 10x, even 100x your inital investment. A $50 option investment could give you a $500 profit just by pressing a few buttons.
I would buy small weekly contracts, worth about $30-$50. Then I would realize a profit of $150-$300 each trade. It was the greatest feeling ever. Felt like I was a genius.
This was during the big market dip back in March 2020. Every single stock was falling hard. All someone had to do was buy put options on any stock, and they would make a ton of money. (Put options make money when the stock goes down). I would buy so many put options that would give me insane returns every morning.
My account went from $500 to $3500 in just one month.
I remember buying a $72 $MRO put with a strike of 6.50. Sold it the next morning for $741 profit. Didn’t even understand why I made that much. That’s how little I knew.
March 23rd, the bottom of the Corona-virus market crash is when I started losing all of my gains. I kept expecting the market to go back down. Thinking, “Oh this is just a small leg up, then it’ll have to go back down. I kept buying and buying put options thinking the market would reverse back downward.
I thought I was outsmarting the market because I just made a killing the last 3 weeks. Figuring I could beat the market, and cash out when I was right.
It took 2 months after that for me to stop buying option contracts. Because my account was now back at $500.
Lessons I learned
3 main lessons from my short endevours with daily trading.
- Have a risk tolerance.
- Do not just buy weekly call & put options.
- Don’t try and get rich quick.
1. Risk Tolerance
In every single trade you do, know exactly how much you are willing to risk. When I first started, I didn’t have a risk tolerance. My mindset was “sell when I make a profit, that’s it.” Or sell whenever I thought the trade had no chance of winning. By this time I was down over 50%.
Truth is, most of the trades you make will be wrong. But if you can minimize the losses, and take profits without greed. Then you will be succesful.
For example, lets say you open a position for $300. Set a risk for 10% loss and close the trade in x amount of time, if you are not over a 30% profit As soon as that trade loses 10% of it’s value, get out. You only risk $30.
Say you choose to exit the trade 3 days after you open it if you aren’t over 30% proftit. By day 3 you are in profit by 15%, close the trade and take your $45 profit.
“No one ever lost money taking a profit”-Bernard Baruch
Having a risk tolerance for every trade allows you to minimize losses. If loses get out of control, it is significantly harder to get back to break-even. Break-even isn’t even the goal, the goal is to make profits.
2. The Truth Behind Call and Put Options
Stock options are a great tool to make money in the market, if used correctly. But are abused everyday by retail traders, in which they end up losing money. You must know options are the quickest and most effective way to lose money.
Fact. 70% of all option contracts expire worthless. Meaning 70% of the time if you buy an option and hold it till expiration, you lose your investment. The odds are not in your favor from the start.
**Weekly contracts are the most risky but you can see big gains FAST. This Is what makes them so attractive for new traders. Oh, and they’re cheap as hell to buy.
For example, you buy a call option that expires in 5 days. The day you bought it the stock goes up 3%. Your ROI that day would be an incredible percentage. But the day after the stock falls 1.5% and your contract is back at break-even price. Even though, the stock is up 1.5% since you purchased, time-decay killed your gains too fast. No one realizes time-decay will EAT AWAY your gains. Most don’t even know what time decay is anyway.
Another note is behind every contract you buy, there is a seller that is thinking the exact opposite of you. The seller thinks the stock will go the opposite direction you do. And 70% of the time, they gain money from it!!
Often times, people with small accounts will buy short-term, weekly option contracts to try and get an insane ROI for themselves. It’s the only way to make crazy money from a small starting amount. They don’t research the trade, do their due dilligence, etc. Or the small amount of research they actually do, is just from seeing a tik-tok saying “this stock has 100x potential.”
With under 10 trades their account is blown up and their hopes of ever using the stock market again are gone with it. Which is sad because the market is an incredble way to grow wealth.
I am not hating on options trading at all. I use options often. But I buy my contracts with a lot of time, I do proper research, and I have a risk tolerance. Using options willy nilly will lose you hundreds of dollars.
3. Don’t Try to Get Rich Quick
This is something that takes a very long time to understand. What I am about to say won’t do enough justice. But hear me out…
We all want to make money, that’s why you’re reading this. Trying to make a days worth of income is EXTREMELY difficult to do. Not impossible, but unlikely. Anyone who trades for a living, is trading with $30,000+. All they have to do is make 2% a day to make $600. Making 2% a day is way easier said than done.
I once tried to use stock trading as my job. Quickly realizing it is impossible to do with my tiny amount of money. It took me losing $3500 in 2 months to realize I can’t trade as my job. I don’t want anyone to experience the same.
I have now shifted my mindset to long-term investing with lower risk trades if the opportunity is picture perfect. Let me tell you, I am much happier this way, and making more consistent returns. Granted they are small, but steps in the right direction for sure.
Once you start realizing it’s about growing your account, and not withdrawing for income. The game changes in your favor.