How I Blew Up A Full Year’s Salary In My Trading Account

Alvin Chow
Alvin Chow

I could not hope for a better start to the year. Within the first two weeks of 2014, I have made US$5+k from options trading. Building on my good results, I was eager to find more opportunities.

I noticed some anomaly in Natural Gas options. Given that the U.S. weather has been unusually cold due to Polar Vortex, Natural Gas (NG) price was poised to rise with the higher demand for heating. The NG price was $4.30 on 15 Jan 14  and I could get very decent premium for call options at strike price of $7, expiring in about 40 days. Seeing a rare chance and that the price needs to pass through several resistances ($4.50, $5, $5.5, $6) before hitting $7, it is likely that the options will expire worthless before hitting the strike price. I went ahead to sell 20 NG contracts.

On the next day (16 Jan 14), NG premiums were still attractive and I sold another 10 call options at strike $7.50, and 20 call options at strike $8. Altogether I had 50 NG options and potentially make another US$4+k to make it to $10k profits for the month of Jan 14!

The price went up and the margin got bigger. On 27 Jan 14, I received a margin call from the broker. He asked if I would top up cash to the account to meet the margin requirement. The price of NG was $5.37 and no where near the strikes. But because my position was too big, I did not have enough margin to buffer the rise in price. I refused and wanted to ask for time to close the position when the US market opened at night (Singapore time), as the liquidity was low during Asian market trading hours and the options pricings were erratic with wide spreads. He said he was powerless to grant the request and the margin team will have to close the positions. And sure they did. They closed all my contracts which wiped out my entire capital. That was US$82k!

How did all these happen? Didn’t I have risk management rules in place? Simple things like stop loss? Yes, I have the rules, but I broke them.

Mistake No 1 – Ignoring Position Sizing (Greed)

As I was making good profits, I became greedy and put on too much options than my capital could take. I was doing 5 times more contracts than usual. If I did the normal size, the margin call wouldn’t happen, and I would have enough margin for the NG options to expire worthless and making a profit, despite the price going against my position. Greed got the better of me and I overrode the rule.

Mistake No 2 – Not Cutting Loss (Ego)

The second safeguard to risk management is cutting losses. The following was what I wrote in an earlier article, after learning from a loss in Gold contracts:

“Instead of rolling trades like what Dave suggests, I prefer to cut the loss fast. And instead of taking a risk-reward ratio of 3:1, I have reduced the risk-reward ratio to 1:0.7.”

I set the rules and I broke it myself. What happened to the promise? Humans cannot be trusted? It was difficult to cut loss because the paper loss was big. The paper loss was big because the positions were big. I was egoistic to hang on to the contracts because I think I was right and assumed I would have enough margin to pull through. The margin proved too much to handle and the broker intervened. Below is a screenshot of the chart and on hindsight, I would have survived because NG closed 5% lower the same day they closed my positions. But that is what a sore loser will say. If I survived this trade, I will do it again in the future. One day I will still blow up. I will take this lesson and move on. Greed + Ego = S$105k Natural Gas Loss

I hear and I forget, I see and I remember, I do and I understand.

I read many scary stories about blowing up and the importance of risk management in the past.

Long Term Capital Management, with a team of Nobel-prized winners and brilliant traders, over-leveraged and could not unwind their positions fast enough.

Victor Niederhoffer bet big in Thai stocks and went bust during Asian Financial Crisis.

Risk management applies to local businesses too. Nanz Chong-Komo was over-ambitious and expanded her One99 shop too fast and ran into cashflow problems which eventually led to bankruptcy.

I thought I knew all these lessons after reading all these stories, but I never understood until it happened to me. I knew the importance of position sizing and cutting loss but I didn’t do them when situation calls for them. Knowing and doing are different.

I was my own Black Swan

I didn’t blow up because of an external Black Swan event. I feared the Black Swan but I didn’t know what it is. No one does. Only on hindsight we know what the Black Swan is. I was my own Black Swan – the real me deviated from the perception of myself.

I perceived myself as a very disciplined trader and person in life. I adhere to rules and routine very well. But when I really think back, I do take shortcuts sometimes and I bend the rules a little, believing everything will be fine. Bending most rules were inconsequential. Bending rules when stakes are high is a killer. I always thought I will position size and cut loss properly but I didn’t in this case. It is good to revisit what I wrote last year:

Jon is the biggest Taleb fan I know. He doesn’t believe in options selling totally. I told him I am going ahead to sell options even if he disagrees. I am going to do it even though I agree with what Taleb said. I explained to Jon that all forms of trading and investing are all about risk management.

Yes, options payoff are non-linear which is unlike traditional linear payoffs from long-short equity strategies. However, it does not mean you will not blow up your capital if you long or short shares. Every trader and investor needs to practise risk management because there is one trade out there that will wipe you out, regardless if you have total conviction about being right.

So what is the difference between selling options or any other strategies? I see one similarity rather than differences – all are risky. I agree with Jon I am picking pennies in front of the steamroller. But this is similar to scalpers, swing traders and trend followers. I will try to jump away from the steamroller as fast as I can so that I can continue to pick the pennies. Jon questioned my overconfidence in jumping off in time and I admit I stand a chance to blow up, without a doubt. And if I do, I hope he will pick me up from there. 🙂

Human Factors in Financial Markets

Along the journey the market will test you. You need to be following your risk management strategy 100% of the time, otherwise you can blow up too. If you trade or invest for next 10 years, you need to be consistently keeping to your rules for a good 10 years. We know it is hard because we are all emotional. Can you guarantee you won’t be swayed or affected by the market movements for the entire 10 years? It isn’t easy. This is why blowups happen time to time. It is because humans failed themselves, not the market and not the strategy.

I find that the following quote most suitable for traders in this context. After the failed attempt to assassinate British Prime Minister, Margaret Thatcher during the  Brighton Hotel Bombing on 12 Oct 1984, the Provisional Irish Republican Army said this,

“Today we were unlucky, but remember we only have to be lucky once. You will have to be lucky always.”

We can break our rules and hope that we are lucky enough not to be caught. And this apply to our everyday lives too.

Driver error accounts for about 80% of the causes of accidents. A taxi driver puts his life at risk every day he drives. He can drive safely for 5 years but the moment he has a slip in safety, he may just get into an accident. This is how vulnerable our exposure to risk is. We can be disciplined for a long time but it takes just a moment of carelessness to get punished real bad. That is why our airline pilots follow a set of procedures to check and fly the aircraft, no matter how experienced they are. We hope they do not skip any of it just because they feel moody that day.

In case you do not get the point, it is very difficult to be consistent with our behaviour because we have emotions. Our emotions can bend risk management rules which can be very costly. We can be lucky to escape punishment sometimes, but one day it will get us. Since humans cannot be trusted all the time, we should minimise our involvement to execute risk management procedures.

You see and you understand

My friends were shock when I told them about the loss. One of them admitted he was breaking his trading rules too. My case reminded him of the consequences. The lesson definitely has more impact to people close to me. Maybe those failure stories that I read were too distant and I didn’t feel afraid at all. I hope you can take the value from this lesson as much as possible.

This lesson will stay with me forever and bring me a long way. I am sure this won’t be the last lesson that I will learn. I can lose money, but I cannot lose my will or my ability to make money. Even though I broke the rules, there was one rule that I kept to it and I want to thank my teacher for it,

“If I am wrong, will I be financially ok?” ~ Dennis Ng

The saving grace was that I did not have all my money in this account. I have 4 other accounts for stocks trading and value investing which remain intact. My lifestyle remains unchanged too. Nonetheless, it will take some time to make the money back. A painful but necessary lesson.

Share this with people you care about. It could possibly help them.

Alvin Chow
Alvin Chow
CEO of Dr Wealth. Built a business to empower DIY investors to make better investments. A believer of the Factor-based Investing approach and runs a Multi-Factor Portfolio that taps on the Value, Size, and Profitability Factors. Conducts the flagship Intelligent Investor Immersive program under Dr Wealth. An author of Secrets of Singapore Trading Gurus and Singapore Permanent Portfolio. Featured on various media such as MoneyFM 89.3, Kiss92, Straits Times and Lianhe Zaobao. Given talks at events organised by SGX, DBS, CPF and many others.
Read These Next

75 thoughts on “How I Blew Up A Full Year’s Salary In My Trading Account”

  1. Writing options is a very risky business, you are lucky to have separate account for this trade and only busted that account. Even specialist can be caught off guard when there is event that happen unexpectedly, just like the earthquake in Japan, resulting in a Tsunami that destroyed the nuclear reactors in Fukushima. The explosion and meltdown of the reactors caused panic and widespread fear, the Nikkei was sold limit down, spam margining kicked in for options position with the increase in volatility, many long positions were cut at ridiculous prices at best available bids.

    Many busted their accounts and some probably went under, that’s the danger of writing options without a stop loss. Always protect the position by buying a further strike price to limit the loss just in case.

    It’s always the unexpected events that kill the option trader, like 911 and it will happen again.

  2. Thanks for sharing your experience. I believe you were trading naked options ? My option trainers advised me against trading naked options & I can see why now.

    • It is not just naked options is risky. All forms of trading are risky. You just need to be careless and unlucky once to be punished. Remember, it isn’t the product that is risky. It is the person who is trading it that is risky.

  3. I have survived the blunder in life, you can do it too.

    Intriguing quote from Og Mandino:

    “Whenever you make a mistake or get knocked down by life, DON’T Look back at it Too long.

    MISTAKES are life’s way of TEACHING you.

    Your capacity for occasional blunders is inseparable from your capacity to reach your goals.

    No one wins them all,

    and your FAILURES, when they happen, are just Part of your GROWTH. Shake off your blunders. How will you know your limits without an occasional failure?


  4. I have been selling options for more than 2 years and have seen my fair share of market volatility.

    What protects the trader is his understanding that the market can be very volatile and we have to stay agile and be ready change direction.

    Besides the mistakes you already identified, I would like to point out that trading any US stock that’s less than 10 bucks is like trading penny stocks in Singapore. You have also chose to bet against the trend. Buffer in percentages means nothing compared to price buffer in stocks lesser than 20 bucks. Take a look at nflx for the past 2 years. It serves as a reminder that market is erratic and deserves our utmost respect.

  5. you actually blow that account or someone else?

    if you are the one, sorry to say try stop trading for a period of time until your pain has gone, at least a few months. can’t believe you sold all those options with such low margin, like crossing the road with your eyes close.

    • Yes, it is my own money. I would not forgive myself if it is other people’s money.

      At that point in time, greed over-ruled logic!

  6. Thanks for sharing will be painful now but I am sure all these will not go to waste.. I am very sure you will come back stronger and earn all the money back..:-D

  7. Every morning, Monday to Friday, I wake up at 5.25am to watch CME NIY (CME Nikkei 225 Yen Futures) and buy or sell up to 3 lots MAXIMUM before the CME NIY futures close at 6.15am. My trading rules says I must not carry more than 3 lots NIY, long or short to the next NIY open at 7am.

    I sold 1 lot NIY at 15150 this morning at around 6am. By the 6.15am close, I have 43 lots short and a floating loss of more than USD 8K!

    How did I end up with 43 lots in 15 minutes when I am supposed to sell and hold just 3 lots?

    Since I started trading futures for a living in May 2004, there were 50 occasions where I had broken my trading rules by adding to my losing positions which resulted in realized losses of more than S$10,000 a day. I would be richer by S$2,500,000 now, had I been able to follow my own trading rules and avoided these 50 losing days.

    I know of only one panacea that could prevent a trader from breaking his trading rules – stop trading altogether!

    • Thanks Jac for your honest sharing. It is indeed hard to trust the human to behave consistently. The enemy is not the market. The enemies are not the other traders. The demon is us.

  8. I reckon it is possible to lose this sum in the normal stock market as well. Yours is really a very scary story and it is really important to keep both ego and greed in check at all times. Thanks for sharing. Take care.

  9. I feel for you.

    I have been trading since 2003. I sell Nikkei 225 options mainly. My trading capital is a total of US$250K across 8 accounts & I generate 8K-12K income monthly. Has it been smooth, of course not.

    I got caught several times, lose money (20-30% of the account size) when the market turn against my positions and each time, I told myself I have to learn to be more discipline, not be greedy, follow rules. Well you are right, it is easier said then done. Over the years, I have become better and have been able to make money from between 60%-400% against the accounts . I subscribe to local billionaire Peter Lim’s saying, “Never be to sad when you lose money, and never be too happy when you make money”. Yes, I firmly believe that most strategy are good but the problem lies with the trader.

    One thing I have tweaked in terms of my trading is to have several accounts of smaller capital Vs 1 account with all the capital. That way, it helped me with cut lose situations cause it won’t look like huge loss for smaller account & I would actually execute the cut loss with less hesitance. Eg I find it easier to lose 1K against a 10K account Vs 10K against a 100K account. I know it is all psychological & that the numbers worked out to be the same at the end but it works better for me. The other key thing I do is that I withdraw money from my accounts whenever it reaches a certain profit target. I use the money to buy stuffs, holidays, save majority, and invest the rest in blue chips stocks whenever the stock market crashed(one in a few years). By withdrawing my profits regularly, I get to see real money in my pocket and that helps with reinforcing that my strategy work and to not be afraid to cut lose when the losses are smaller/manageable & that I will make them back as I have always been able to so far. (Hope my luck continues)
    Apart from that, withdrawing my profit regularly keeps the trading capital consistent so that I can apply my rules more consistently and to hone in my trading. Trading is about discipline as much as the strategy and one need time to master over oneself and allow me to take the time to expand my comfort zone before increasing my trading capital. So far, my trading capital has been increasing at a rate of 10K per every 1-2 years.

    Just sharing my own journey. Not saying it will work for everyone.

    • Joz Koz, thanks for your honest and wonderful sharing. Inspiring!

      Happy to hear that you are doing well and managing the risks properly.

      I wish you all the best. Keep your eyes on the risks! Don’t slack off!

  10. Bro, I feel for you. In trading, the biggest enemy is always ourselves. I believe this incident is inevitable and is part of the process for you to be successful in trading. Wish you all the best.

  11. Alvin, everyday we are learning to be a better trader by paying school fees to the market. But this school fee is high to swallow.

    God bless you. Gong Xi Fa Cai.

  12. Reading this shock email when I just lost 100 bucks on long Apple CFD due to gap down (I play only 10K capital for angpow only). Have been reading your blogs and also the book you recommended “Trading in the zone”, that is really just flip or mind and flip of click will make us emotion swing. Hope this year you are able to get it through.

  13. Trading is indeed a very risky business. Often we hear how much people can make from trading and we want it too. But I’m sure there are much more losses than winners out there. In the end, only a few can be successful in trading.

    Thanks for sharing your story with us Alvin. It takes guts to admit a mistake and move on from here. I’m sure you will get back on track soon 🙂

    • Yes, Trading is glorified because we do not have enough traders to admit their losses.

      I hope more traders come forward and be honest. In this way, we can overcome our past mistakes faster and soar to greater heights!

      I appreciate your well wishes 🙂

  14. Very few people will go around telling people they have lost $105k. They only posted their winning trades, so it’s a very good thing what you share with us so that we don’t fall into the same trap. And I am sure this lesson will be your turning point to success.

  15. Hi Alvin,
    Really sorry to hear of your big loss. When I saw the heading of the post, I thought you copied and pasted the article from somewhere and that someone else blew up. Those who follow your blog will know that you have interviewed several experienced traders and read much related literature on trading. I was quite surprised to discover that you, of all people, could make this mistake. Hope you won’t feel bad if I say you are the last person I would expect among the financial bloggers I follow to make such a mistake. However, I am confident you will bounce back. Not many traders are like you to have the intellectual honesty to own up to their own mistake, blame themselves and even share the investment lesson to the public. If I could bet some money, I will surely bet you will bounce back.

    In a past post last year, you mentioned that you will devote yourself full-time to your passion. I guess you quit your full-time job recently. Do you think not having a regular income could have somehow affected your psychology? Somehow got impatient to earn more to make up for the lost income, resulting in the outsized position? I think this is quite normal. I was jobless for a period and was quite wary of how it can play tricks on my speculative psychology. I am sure you will recover in time. Just a matter of how soon.

    • Thanks hyom for your ‘bet’ on me! I also didn’t expect me to blow up. Well, sometimes the least you expect happens because of carelessness.

  16. I find it contradicting that there are posts on STI ETF and passive investing and also posts like this on this website. How do you account for that Alvin?

    • Different strokes for different folks. It seems like you are a new reader and that is why you have yet to get exposed to the activities that I engage in.

      I trade options and practice value investing if you have not know it by now. I no longer do sti etf and permanent portfolio but I still think they are very good product/strategy for retail investors. That is why I continue to write about them.

  17. Hi Alvin

    I’m learning to write options and looking to educate myself on the risks of doing it.

    From what I read in this post, the trade would have been profitable if the position size did not increase. The trade busted because of margin calls.

    In another post from part C,

    “This is confusing since most brokers will insist you pay margin on any short option positions nowadays. This means your option position is going to be marked to market daily. Short straddles/strangles in particular are so risky that a lot of brokers will not even allow you to net the margins on the positions. Unless you have very deep pockets, your margins could run so high that you go insolvent.”

    Do you think the market structure of this product/strategy play a bigger part in this losing trade compared to the faulting of the individual?

    Thank you

    • Hi FW, you are right that margins took me out of the strategy. I put so much blame on the trader because I allow the margins to go against me. I should have taken the loss according to my rules. Regardless, the brokers are always safeguarding themselves, in case the clients could not pay up since selling naked options is said to have unlimited downside. A iron condor strategy is always safer and margin requirement is lower too.

    • They didn’t say an amount. They just asked if I would.

      At that point in time, price is moving against my position so no one can tell exactly how much to top up.
      The broker can keep calling again if the amount is insufficient subsequently.

      On hindisght, USD 10k would be sufficient.

  18. I just came across this website recently and the articles here are wonderful and enriching for beginners like me. However, I have a question here, can someone guide me about how the options trading works? I got confused about how the author actually lost so much money in options trading. Thanks.

  19. hi i like your honesty , would like to know u more . I know option, equity , forex and binaryoption . Drop me an email would be much appreciated. I m alone trading i n Sg

  20. Hi Alvin, thanks for your kind sharing.

    Popular media always teach us “stocks are safe, bonds are safer, futures and options are bad” and in turns out they are not entirely true. I completely agree with you that a position is risky whenever money is on the table; regardless of product.

    I had a stock position (GTAT in US) that went down 90% in one day, when all analysts are issuing bullish recommendations. AAPL can have a flash crash of 7% in one minute. Who said stocks are not risky?

    All the best to you.

  21. Hi Alvin, just finished this article. So how’s your ROI after Jan 14? Was contemplating if I shd go for his course or just buy the Home study course from Dave.

      • thanks for ur story. great lesson for ppl juz starting out like me. 1st of all, whose course are u referring to? 2nd, i recently started writing options too and i was wondering why u advocate cutting loss instead of rolling? theoretically, if u keep rolling, doesn’t the trade become “riskless”?

        • Hi newbie, you cannot keep rolling. Your risk will become larger.

          For e.g. In order to cover your initial loss, you often need to double the number of contracts. If your loss is one contract, you need to sell two more contracts further OTM. And if you keep rolling you will run out of margin and the broker will ask you to top up or force close your position.

        • I believe Alvin was referring to Dave foo of nondirectionaltrading,com, but it is not selling udemy course. And he was no contactable as told by many of his students since 2014.

  22. I still selling premium on ES, but now doing vertical spreads and not naked which Dave taught us. I suffered a huge loss in Dec 2013 when selling NG premium. My whole account was blew up too.

    Selling premium is still a better way of generating income but do remember not to use up all your margin. I have been profitable since this yr return back to options selling.

    Dave’s website is gone and I believe he also suffer from NG incident, as remember him talking during a seminar in Dec 2013. So even guru can make a wrong move.


Leave a Reply to hyom Cancel reply