So I came across a very interesting post recently on the FH Facebook Group.
It was an investor sharing about his $618,848 loss options trading in 2022.
Now that really caught my attention.
Upon a deeper dive, I found out that he started with a $1,000,000 portfolio on Interactive Brokers.
Over the past 6 – 12 months, he has been buying long dated FAANG call options.
Unfortunately, the crash in the NASDAQ has not been kind to him.
As we speak, of his original $1,000,000 portfolio, only about $394,000 remain.
Intrigued – I reached out to ask if he was keen to share his story.
What follows is an exclusive Financial Horse interview with Jason Cai.
Hi Jason, can you share a bit more about yourself?
Jason: I am 40 this year, married and am a young parent.
I work as an IT professional.
I am not some rich guy who thinks that 648k is peanuts in my total net worth.
Neither am I bankrolled by rich parents.
My parents were blue-collar workers who struggled to make ends meet when I was growing up.
The reason that I am able to assemble almost a million worth of capital at the age of 40 is because I have worked hard and been frugal in my lifestyle.
I started taking on jobs during vacation since I was 10 years old, working as a food packer in my Auntie’s food stall.
Subsequently, I took on various holiday jobs, such as working as a cashier in NTUC, working in a 5-star hotel delivering laundry for guests, giving tuition when I was serving NS, in Uni and when I was working full-time.
I also sold fish as part of my fish-keeping journey and in recent years, sold a motivational book that I spent 6 years writing.
Every penny was earned through my own efforts and I feel the pain of losing them all.
Every penny was earned through my own efforts and I feel the pain of losing them all.
You started options trading with $1 million, where did your primary source of funds come from?
Jason: The source of funds came from:
- Selling away almost all of my SG stocks
- The profits from dividends & sales of shares from the first 9 years of investing
- The realised gains from options trading
- Sales of my Singapore Saving Bonds
And the rest came from my monthly salary (after deducting all my family expenses).
That was how I managed to save up a $1 million portfolio on Interactive Brokers.
Over the past 9 years you were primarily a dividend investor focusing on Singapore – What made you decide to start options trading with US stocks?
Jason: When I am doing the household chores, I enjoy watching and listening to financial videos on YouTube.
I remembered back in late 2020, when I started watching financial videos on YouTube, one particular channel stood out and I became interested to buy US stocks, after avoiding it for many years in fear of the volatility.
That channel is Chicken Genius Singapore by Ken Teng.
I watched almost all of his videos in his channel and became very interested in buying Tesla stock.
Few months later, Ken also introduced the concept of using options to complement his main portfolio.
That got me interested to learn more about options trading.
I spent the next couple of months watching plenty of videos on YouTube to understand options, before making my first trade in Feb 2021.
Down $600,000 is a massive amount – how do you feel after this loss?
Jason: I just want to get something out of this experience and be positive about it instead of wallowing in self-pity and pain.
Every bad experience that has happened in my life has led me to better appreciate what I have now.
I just want to get something out of this experience and be positive about it instead of wallowing in self-pity and pain.
For example, the sucky days of being confined when I was serving National Service and being constantly picked on by a nasty instructor made me appreciate my freedom and good bosses now.
The days spent in the operating theaters and hospital beds made me realise how wonderful it is to be alive and healthy.
And if I were to lose the money that I have earned over the years, then I will hustle hard to earn them back again.
As long as I am healthy and well, everything is possible.
Maybe my early retirement plans would have to be postponed, but it may turn out to be a good thing after all.
Retiring too early without nothing much to do can sometimes make a person lose all his drive and discipline.
Money is important in life but what is more important is your health (physical and mental).
The road ahead may be rocky but in the right frame of mind, you will survive it and ascend to a whole new level.
Many years later, you probably look back and thank life for giving you such a wonderful experience to learn and to grow.
One of my favourite quotes below:
What do you plan to do next? Will you still continue options trading after this?
Jason: Yes.
I used only 2 simple options trading strategies when I started in Feb 2021:
- Wheel (which involves collecting premiums from selling put and calls) and
- LEAPS (which is about buying long-term call contracts and selling for a profit when the premium rises in value).
LEAPS gave me phenomenal returns in 2021 but failed miserably in 2022, where I am on the path of losing more than 453k by Jan 2024.
Having said that, my wheel strategy totally outperformed the LEAPS strategy in 2022. I have generated about 100k in 2022 despite the tech and chip companies crash.
Therefore, I hope to continue to earn monthly side-line income through options trading.
Will your lifestyle be affected by this loss?
Jason: My lifestyle and family livelihood are sustained by my current salary.
So, while the investment portfolio is crushed, it has not affected my lifestyle (yet).
How is the rest of your portfolio allocated? Do you have savings set aside?
Jason: I have less than 10% of my total financial assets in savings accounts and Singapore Saving Bonds, which serves as an emergency fund.
The bulk of my savings are inside my IBKR brokerage, which is currently down by 600k.
The reason for taking this risk is to generate a substantial amount of side-line income that can replace my day job, which can help me achieve financial freedom.
The reason for taking this risk is to generate a substantial amount of side-line income that can replace my day job, which can help me achieve financial freedom.
The bulk of my savings are inside my IBKR brokerage, which is currently down by 600k.
What advice do you have for other investors out there, who are thinking of starting options trading?
Jason: It is important to understand the risks when trading options.
As an options contract buyer, time is always your enemy.
You do not have holding power if the market goes against your bet and stays that way.
With every passing day, the contract that you hold loses time value and the only way to still win is for the stock price to rise higher before the options contract expire.
With risk comes rewards, as a newbie options trader, weigh the risks before getting started.
It is important to understand the risks when trading options.
If you could go back in time, would you do anything differently?
Jason: I would taken the huge profits that I made in 2021, and reinvest into stocks and hold them for the long run.
And then I would sell covered call options against the stocks that I own, and generate more side-line income every month.
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With what you know today, what do you think is the single biggest mistake you made when trading this portfolio?
Jason: I think my biggest mistake is failing to see the correlation between rising interest rate and tech companies (which hurt their profit margin), no matter how mighty they seem.
My trading portfolio is made up mostly of tech (FAAMG) and chip companies (Nvidia, AMD) and although they are among the most valuable companies in the world, they are hit hard by the fears of rising interest rates.
If I had managed to spot this, I would have reduce my weightage on tech and semiconductor companies and diversified my portfolio further.
Latest options portfolio below, as at 16 June 2022:
Quick Thoughts from Financial Horse
I worry that many people will walk away from this article thinking that options are dangerous and to never touch them.
Nothing could be further from the truth.
The way I see it, options are like a hammer.
You can use a hammer to destroy.
But wielded properly, a hammer can also be used to construct great monuments.
Options are exactly that – a tool.
It is the thinking behind the deployment of options, the risk management framework, the understanding of the fundamentals that drives markets – that’s what protects you when the market turns.
These are easy to ignore when we are in a raging bull market driven by excessive Fed liquidity, but it’s very clear that the investing paradigm has changed.
Volatility has soared, which makes options less effective because of how implied volatility affects options pricing.
Advice from Financial Horse?
My advice – focus on getting the basics right, before you move into the more advanced stuff.
Focus on mastering how to walk, before you try to sprint.
If you’re new to markets, stick with cash only.
Stay away from leverage, and stay away from options.
Once you get more comfortable with your cash account. Once you understand how macro movements affects financial asset pricing. Once you understand how earnings and market expectations drive share prices.
Then expand into the more exotic instruments.
Refinancing tool
With rapidly rising interest rates – it might pay off to look into refinancing if your loan is coming due.
I know a lot of you have been writing in for my views on fixed vs floating loans, and I plan to write a full article for this.
But in this market – I think you’re pretty much forced into taking floating. The banks themselves know interest rates are going up quick, so the fixed rate loans are priced in such a way that they aren’t sufficiently attractive (in my view).
In the meantime, there’s a fantastic tool by Property Guru.
Do give it a try if you’re close to refinancing.
It’s completely free – you just input your mortgage details, and the tool lets you know whether you’ll save money by refinancing.
If the answer is yes, they’ll give you recommendations on what loan to take.
If the answer is no, you can set up a reminder for the tool to remind you when its time to refinance.
I set up the reminders for my own properties just this week and it’s pretty neat.
Do give it a try here.
Thanks Jason for sharing his story & valuable lessons!
Have you tried options trading? Comment down below!
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FH,
Options trade volatility in the market, with complex strategies in any market conditions n news, Recent high profile tradable movement $GME, twitter take over, interest rates movement etc. investor just need to determine what they want for themselves on their investment n using option as a single tool to accomplishing financial freedom or FIRE, is just too risky and Asset Diversification is always key here in a choppy market, it is also a good time to buy into tier 1 stocks at reasonable prices.
Above are not financial advices. Please do your own Due diligence n research.
Well there are many ways of investing in markets. Like you said – it is for each investor to decide what works for them! Everyone’s risk appetite and competency level is different.
Is it a case of allocating too much % to risky investments? If I had a $1M capital, capital preservation would be a pretty high priority for me.
Possibly – but risk appetite is very personal. Might be that he was comfortable with this level of risk.
Seems he bit off too big a bite. $450K out of $1M for derivatives is really speculating. That position size is more for portfolio size of $10M or $20M.
From what I gather in his replies, the so-called LEAPS strategy is to buy leaps call options at the beginning of each year & hopefully the underlying stocks go up so you can sell or close the leaps at leveraged profits. (Leaps are long-dated options from 1-3 yrs, usually 1 yr)
It’s a 1-way ticket bet, which is the worst way to use options. You either win big or lose big.
In property analogy, it’s like buying a leasehold property with only 1 year left. And you’re hoping to flip it in an irrational roaring bull market before the year is up & the leasehold expires. And you repeat this at the beginning of each year. Man, something’s gonna break eventually.
Hopefully both the mid-term election year & decennial 2nd year seasonalities play out & stocks may boom strongly from Oct.
Agreed with this.
Although I suppose had he done the same thing in 2020, he would have made off like a bandit.
But I also suppose had he had the nerves to do the same in 2020, we would not be writing this article!
Thank you for the sharing. While I don’t use options, the sharing makes me think of 2 learning points
A) Regime change. Tech stocks may be home run in late 2020-2021. In 2022, the environment/regime changes and tech stocks become one of the worst performers.
How to mitigate regime change:
1) Diversify, Asset Allocation — e.g. owning world index fund, having different types of asset
2) Cut Loss — e.g. Sell if losses hits X% loss or price breaks support line etc.
Cut loss is crucial when dealing with leveraged instruments, as large short-term movements can damage your capital permanently.
B) Importance of knowing what you don’t know and hedging against ‘what you don’t know’
Learning what you don’t know from the market is expensive. (1) and (2) above hedge against ‘what you don’t know’, to some extent.
Agreed! To build on that point of regime change – if we are indeed moving into a decade of higher rates higher inflation – what other parts of one’s portfolio are going to underperform?
I suspect not enough investors are asking this question.
Dude, this guy got lucky with tesla and went all in leaps calls. Buying right at the top and now selling the bottom. Typical retail. At first on his blog he tried to be guru, only later turned. Either 1, he’s rich to start. Or 2. All this is fake paper account, just getting readers to earn on his blog. Hope his readers don’t follow him.
Haha well, that’s one way of seeing it.
I think the basic principle in investing remains – like Buffett says – first principle is don’t lose money. Second principle is don’t forget the first principle.
In practical terms, I think this means don’t try to get rich quick, whether it is crypto, options, property etc. One may be up dramatically at one point or another but himan nature is such that if this happens, one will only invest more and it will all lead to grief at some point.
Too many people focus on returns instead of risk. If one is returning much higher than the market, ask oneself what risk is one taking in return. There is no free lunch unfortunately and one being an investing genius is about as likely as one winning a Nobel prize – possible but highly improbable.
Warren Buffett was asked why more people don’t follow his investment principles and his reply was that most people were not interested in getting rich slowly. Touche!
That’s a great comment CMC. Fantastic sharing, and absolutely agreed!
His biggest downfall is to believe 100% what he has watched on YouTube by all these gurus.
Chicken Genius is no longer around. Victim has to pick up the pieces himself.
From the look of things he hasn’t learn his lesson.
To each his own.
While hoping that he would at least breakeven, he needs to realize that he doesn’t have too many 10-years cycle to turn things around.
Should save all profits earned while trying to plough it back into options trading that is sheer madness n to think that he could outplay Wall Street – “foolish” thoughts.
Better to be a bit on Conservative no??
Hi FH,
Thanks for the sharing.
Regards,
Gerald
https://sgwealthbuilder.com
You are right about options as a tool. But it’s not just a hammer but a whole toolbox. Problem with Jason is he only knows how to use 2 tools which made him a lot of money in 2020 and 21. He used the same tools again in 2022 but unfortunately market took a turn and here we are. The root problem is many of the option YouTubers sprouted in the wake of the 2020 bull run with selling cash secured put and covered call as their mainstay strategy. Besides that they know nothing about the other tools in the toolbox or they just pretended they know how to use the other tools in the toolbox. Tools are never meant to be risky if one knows how to operate it. People that say options are risky is no different from someone touting options can make tons of money easily, both lack complete understanding of how to use all the tools in the toolbox.cheers