In my post, “How I made $12,000 and paid off my student debt by investing”, I outlined how I traded options to make a significant monetary gain in 3 weeks. I took my gains out of the market and put it towards paying down my student debt. The entire experience gave me a tremendous amount of confidence. I had picked 6/7 stocks correctly — not to mention at seemingly perfect times — and it felt really good. It also felt good knowing I had paid down my student debt. But what now?

How Do You Invest When All Of Your Debt Is Gone?

Should I be more risky with my money? How do I grow wealth starting at square one? Do I invest in the most risky assets considering I have a stable job, low expenses, and steady income?

Well, I tried being even more risky, ditching my more stable strategy of buying long in-the-money options on fundamentally undervalued stocks, and instead buying weekly options (aka option minis). I bought into minis right before earnings announcements, since there’s generally large swings in stock prices following the announcement. And you know what, it worked! I turned $12,000 into $20,000 in 2 weeks. I made an astounding 7/8 perfect directional picks. I was excited. I was onto it again. My instincts were good.

But there was one problem – I wanted to risk it all. I wanted to get to the next level. I saw the dollar signs adding up – and saw what I could do if I just nearly doubled my money one more time.

The Reason Why I Got Burned On Option Minis

Stock prices usually drift higher or lower the week or weeks before heading into earnings as investors place their speculative bets for the announcement. The stock I bought into I knew well, had been following since freshman year of college, and expected earnings AND revenues to beat estimates. So, naturally, I invested everything. I wanted the maximum risk – and the maximum reward. I anticipated that this stock would continue to drift upwards following its announcement of strong earnings.

I Was Right Again!

Guess what – I was right about earnings AND revenue. I was right. But being right about beating earnings estimates doesn’t mean you win.

What I didn’t expect was that the company decided to issue a warning on future revenue growth. This was something I could not have foreseen. The stock dropped 2% in after hours, and by the morning, the stock was down 9%.

I was devastated. In fact, I didn’t even believe what the company’s management had said. I had a much rosier outlook than the company’s management. Still, the markets responded to the negative outlook, and I was nearly wiped out. Yes, weekly options have lots of upside, but they also have downside, and I had finally tasted it.

What I Learned

  1. If you are right with your expectations, you can still lose money. There are other factors at play you cannot anticipate. Plan for the unexpected, to a healthy extent.
  2. Invest in more than one company – do not put all of your eggs in one basket (duh! – even though I was trying to maximize risk/reward).
  3. The strategy of long in-the-money call options is more viable, although I am trading off the reward, I won’t be wiped out overnight.

Going forward I look to do a combination of long in-the-money call options with 75% of my portfolio and the other 25% will go towards weekly minis. I will reset this ratio after each trade where it makes sense (to not have too many transaction costs). On to the next trade!

What’s your investment strategy?