Options trading is a way to generate incremental returns for one’s portfolio (via selling covered calls) and speculate on large moves (buying calls and puts).  Options trading, when coupled with sensible charting and risk-taking, allow investors to profit in both up, down and sideways markets (if executed properly!).  My goal is to develop this skill over the next ten years and see whether or not I can consistently make money over the course of my trades.  Do not take my advice as anything other than one man’s attempt to educate himself by putting his own money on the line and documenting his lessons.

As I have written earlier, deliberate practice makes perfect.  I do not want to place “gunslinger” trades based on tips and buy on impulse.  When I propose a new trade, I will explain my logic and check against the eventual outcome to validate if my assumptions were correct.  I am posting my open options contracts to maintain a form of discipline over myself and make sure I do not trade out of emotion.  Please read my disclaimer below.  For the time being, I am only going to purchase (go long) options.  As a result, my potential losses will be limited to my initial investment.

First trade:

35 July PUT – Darden Restaurants Inc.

Rationale:  I have a bearish outlook on the equity markets in general and I believe our current rally (March – April) is the result of speculative buying and/or short covering.  I am not convinced that the rally in the price of Darden Restaurant from $15 to $40 has been driven by any tangible changes (higher sales, increased productivity, higher cash flow).  As such, I find this rally to be a short-term, speculative rally.  Does that mean that stocks cannot rise more?  No.  It simply means I believe the price is rallying for no intrinsic reason.  Therefore, I do not believe this rally can carry on forever, especially when I see the chart (more on that later).  With the price nearly tripling from its December lows (an almost 300% return!), I do not think the stock price can keep advancing for very long without a significant pullback.

The two strong reasons why I pulled the trigger:

1)  Going long this put means I do not have to time a downturn perfectly.  The stock can continue to rally, but as long as it finishes below $32.75, I will be profitable.  35 is the strike price, 2.25 is the price paid for the option.

When buying a Put Option, the following applies:  Strike Price – Initial Investment = Breakeven Point  35 – 2.25 = 32.75

Once the stock drops below $32.75, I will make (in theory) $100 for each $1 decline in price.


2)  There is a large gap from $28 to $36.  Gaps are often retraced and filled and in a parabolic rally, like the one DRI is in, it is not unlikely the stock will fill these gaps.


There is also one weak reason I have for buying this option.

1)  Consumer weakness will eventually manifest.  This is a very weak reason since there is no telling when the consumer will truly slow down consumption.  The save over-leveraged spending habits have been in place for years… assuming they will assert their presence in my limited time frame makes this the weakest of the three reasons.


I believe Darden will retrace to fill in the gaps around low 30’s.  If I feel the market can plunge further, I will hold my position.  If the market appears steady, I will book the profit.  Since this option trade is small, I am comfortable holding this option until expiration (expiring worthless).

Comfort Level

Although I feel confident that Darden will pull back, I am not satisfied with the way I entered into it:  with a hunch and with a “Oh well, it can’t go any higher” attitude.  Calling tops and bottoms is not a strategy with a high-win ratio or a theory that can be executed with regularity.


I will post this trade in my Trading Log where I can track it daily.  Please provide feedback for this trade and let me know if you find my analysis to be lacking in any way.

For more about deliberate practice, read here.

DISCLAIMER:  All opinions expressed on this website are solely my own and do not reflect the opinions of anyone else. You should not treat any opinion expressed on this website as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of opinion. My opinions are based upon information I consider reliable, but I do not verify its completeness or accuracy, and it should not be relied upon as such. I am not under any obligation to update or correct any information provided on this website. My statements and opinions are subject to change without notice.  Past performance is not indicative of future results.  Risk of loss exists in futures, options, equities trading.

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