One investment philosophy that I follow is this. If you can make it extremely hard for you to lose money, making money in the long run is the default.
That's right. While others are always looking for the "best" investment strategies. I do the opposite, I try to develop a strategy that makes it so hard for me to lose money.
It is exactly what Charlie Munger said:
All I want to know is where I'm going to die, so I'll never go there.
In this article, I want to dissect a case study on one of my call options, and how I make it so hard to lose money.
A Case Study On MasterCard
I bought a MA call option on 22 Oct 20 for $6,500 and subsequently I sold it off at $6,875 on 3 Aug 21. That's a profit of $375 (i.e., 5.76% return) over the course of 285 days.
Now, that is pretty sad returns actually.
So why did I sold it off at such miserable returns?
Well, the answer is because it was by design. It was a stop order by one of my strategies called TP secure.
You see, by default, I also target a 100% return on my call options. However, whenever my call options starts to make at least 30% profits - I implement this called a TP Secure, or a Take-Profit Secure.
P/L % | TP Secure % |
|---|---|
30% | 0% |
40% | 10% |
... | ... |
90% | 60% |
100% | Take Profit |
So when my MA call option was making 40% profit at one point of time, I placed a "Stop Loss Order" to secure 10% of my MA call option profits.
Since I bought the call option at $6,500 - a 10% profit securing was $7,150.
This means that if the share price of MA to fall, at least I am walking away with 10% profit. (Hopefully).
Well, as I explained earlier, I ended up selling the call option at $6,875 instead, and only making 5.76% return instead of securing 10% profits.
Why did this happen? Well, it is because a stop order does not guarantee that it will necessary sell off at the stop order price. It simply means that once the call option was worth $7,150 - the broker will sell it off as soon as it can.
Because, the option price may be moving fast, the broker can't sell it at $7,150 in time. And I ended up selling at $6,875 instead of $7,150.
Why I Do Stop Loss Orders?
Well, there is another type of order called the Stop Loss Limit Order.
This means that once the price of the call option is $7,150 - the broker will only try to sell it at $7,150 or a better price - rather than selling it immediately at whatever price it is.
Seems pretty good right?
Well, here's why I don't do it. Because if there's a price gap, it means that the broker will never get to sell the call options. And your call options ended up bleeding deeper and deeper. For some, they will start to deploy the "hope and pray" method so that the share price will appreciate again. More often than not, it ended up bleeding even more, and they end up with a huge loss.
You see, investing is largely an emotional game. By doing a simple stop loss order, I have taken my emotions out of the way. This is the reason why I can afford to not monitor for stock market anyways - because I genuinely don't care why share prices go - everything has already been planned ahead of time.
It is silly to care about market movements. You will be much better off spending the time, reading a book, building a side business, spending time with your hobbies, families, etc.
Why I Actually Made More Than 5.76%
If I only made a 5.76% from a call option, that would be quite miserable. I actually made an extra $1,440 from selling options. This is the milking the cow strategy, which I explained in my other blog posts, "I’m Making Money – What Should I Do?"
So, in total, I in fact made 27.9% return from the call option trade. While it is not the ideal 100%, doing these two techniques, 1) TP Secure and 2) Milking Cash Flow - I have made it very hard to lose money using call options.
The Bottom Line
While many people chase high returns, and trying to jump from one strategy to another, taking unnecessary huge risks - I focus on protecting my downside. If you can protect your downside, it is inevitable for you make consistent profits from the stock market.