A long time ago in a brokerage far far away…OK so back in December 2003 and in a shop 40 minutes north of where I live I screwed up. I put in a trade, screwed up and instead of being long 1000 contracts for the Q’s I put the client long 2000 contracts. With the AMEX being the total pile of crap exchange that it was we got jacked on the spread and my screw up ended up being even worse. Still if I had just closed it out the firm would have been out $5,000 and I would have been yelled at and life would have gone on.
Of course I was watching it and I thought “if I wait a few minutes it will tick back up and I can get out for flat minus the commissions. So my error would have gone from $5k+a couple hundred bucks in commissions to only a couple hundred bucks in commissions…of course I am writing this so that is not what happened. No, instead of the option contract that had been ticking up and down for 30 minutes it then started to bleed lower and lower. I then felt painted into the corner as my $5k screw up had grown into a $15k+ mess.
Of course it didn’t stop there and it kept losing value. Sometimes it ticked up $5k but not enough and then it rolled back over. This started on a Wednesday about an hour before the close and I held it overnight. Yeah stupid right? Any ways I come in Thursday and nothing had really changed. Over the course of the day I got in the hole more and more. At this point I was sick as I was down basically two years of salary. Maybe I would not lose my job but I would at least be an indentured servant for a long time probably only taking home enough to pay rent and eat ramen for the rest of my life.
Well Thursday towards the close things started to reverse and the QQQ contracts I was holding went from having me down six figures to only down like $15k or so again. With this new momentum I thought “maybe this will carry into Friday”. Yeah I know you are thinking “you’re an idiot” and it is hard to argue with you.
Friday I come in feeling less sick but still sick. The af thing wasn’t a thing yet or I would have said sick af but you are safe to assume that I said the F word a couple billion times over these three days. Anyways I come in and lo and behold the options had gone nowhere. I was not down more or less than I had been at the close of Thursday.
I stay in the trade throughout the day and the trade error oscillated between being down -$20k to -$10k. Way way way way better than the six figure loss but still a hit I didn’t want to take. You see since I didn’t take the hit immediately and report it as an error I knew that this was coming out of my own pocket and not just anything above $5k but all of it. It wasn’t a said or even unsaid rule but when you take the risk you take the pain so I just knew.
Towards the close, literally less than 20 minutes before the close, the QQQ contracts came up a little bit and now I was down $15k and then $10k and then $15k again. I was trying to decide to hold over the weekend or just bang out of the trade, go to my boss, and say “I owe you money and this will never happen again and I am stupid and please don’t kill me” or something like that.
Why would I want out before the weekend? Well aside from the fact that anything can happen options bleed time value every second and even more over a weekend as that means the option has two less days to move before expiring. Go google “option time value” and you will see what I mean.
Well with like 12 minutes to go I say “F it” or something similar, hit the bid, and I am out $10k. Immensely better than being down six figures but still a big hit for me at the time. There was even a reporting glitch so I didn’t get a report of the fill for 30ish seconds longer than normal.
So why do I hate Saddam Hussein? Well if our internet had been down or if Saddam had been one day less sneaky or if I had not known about option time decay I could have held over the weekend and instead of being down -$10k I would have been up like +$350k or something stupid like that. Remember that stupid “spider hole” that this piece of shit dictator was hiding in when US Special Forces found him? Well if he had been any less hidden at all this could have happened on Friday before the close and not Saturday after my position was closed out.
In the long scheme of things his life would have been the same since they hung him on December 30th, 2006.
What happened to me? Well I wrote out a check for $10k and life went on. On December 30th, 2006 I held a small “Hanging Saddam Party” with small nooses as party favors and pork on the grill. He was a bad man and…his timing sucked.
Seriously though I learned a big lesson and since then every trade I have ever gotten in had predetermined risk that I stuck to. I use position sizing models, portfolio risk tools, and stops religiously.
P.S. This might seem like a weird inaugural post to my personal blog. Celebrating the death of someone, being mad that he got caught 15 hours or so too late, etc. Well first off I had a conversation yesterday where this story came up when I told a buddy to just close out a losing trade and move on as it’s almost always better to do that vs staying in it hoping it comes back. I mean if you close it the trade goes exactly where you wanted it to but if you stay in…well that damn Murphy fellow just dumps bricks on you for fun. Secondly-I have no real remorse for having a Hanging Saddam Party. Evil is an understatement. BTW I was also overjoyed when Castro died but slightly saddened that it happened of natural causes. On the other hand I hope you and your family-assuming you aren’t a horrible dictator or similar character of person anyways-live long and prosper in every way.