Thus far it's been a great time. I haven't made a ton of money. Better still, I haven't lost any money, despite taking a few losses. Still very much to learn.
About a month ago, I was reading a report on seasonality and Options. The author mentioned that Kansas City Southern (KSU), a freight company has a strong tendency to appreciate in price going into the Fall months.
I decided to err on the side of caution and paper trade an At-the-Money (ATM) Call Option on KSU.
I really liked the idea of trading into stocks that have a strong seasonal track record. Disney, for example, traditionally spikes starting in May. Makes sense. Kiddos are out of school, and it's peak season for Disney business.
So, I entered the trade, and that's where the adventure began.
Mistake #1: I Made a Really Poor Entry, and Traded Too Large
First, instead of fine-tuning my entry by looking at the charts, I just placed a trade. Turns out that the market was in consolidation and I bought the top, leaving plenty of room for the trade to go against me.
Secondly, I traded way too large. The Calls were $2. A single lot controls 100 shares, or $200. But Think or Swim's Demo platform defaults to 10 contracts, and I forgot to change it to 1 contract.
So, now I have $2,000 tied up.
And guess what happened?
KSU dove down to the lower Keltner Channel. Almost overnight, I'm down $1,600 dollars and I'm not feeling good about myself.
This is where emotions set in. I was ready to close out the trade and eat an expensive mistake, but then I gave the charts a nice long look. I arrived at four conclusions:
- I'm at the lower Keltner Channel. Odds are in my favor that the market will cycle back up.
- I took this trade based on an author's report on seasonality. Historically there was a high probability that KSU stock would rise in price. Stay in the trade. See what happens.
- I took this trade in September. It expires in December. Markets cycle. Chill out.
- I'm still an idiot for my poor execution when placing the trade.
Sure enough, KSU moved back up to break-even. No harm, no foul.
Mistake #2: I traded right through the KSU Earnings Report
That's a crap shoot. A total gamble. If their earnings disappoint, I'm back down $1,600 or more. I did not pay attention to their upcoming earnings.
As it turns out, KSU crushed their earnings, and the stock skyrocketed. Now, I'm up $3,600 overnight and I cashed out for a very handsome profit.
There was nothing good about the way this trade was executed. It was sloppy, and I got lucky.
Mean Reversion in My Live Account
After an enormous gap-up, stocks usually pull back before continuing to climb.
So, I placed 2 ATM November 15 PUT Options at the $146 Strike Price. I paid $2.85 for a total of $570 in my Robinhood account.
So, I placed 2 ATM November 15 PUT Options at the $146 Strike Price. I paid $2.85 for a total of $570 in my Robinhood account.
The trade was placed to today, and it has been up as high as 30% intraday. I believe this trade has room to run for greater profit.
