options trading risk

How can you go bankrupt trading options? How can you lose your house and all your money?
Let me tell you how it could be done.

Why am I telling my story of near financial disaster -- a disaster which could have not only taken all the money I have now, but could have taken all the money I could have earned in my lifetime.
It could have brought great sorrow to me and my wife. This is a tale of woe that all options traders may find helpful.

It all began when I decided to sell options. I had been investing in the stock market for a little
over 10 years. In 2006 I decided to jump into options trading. Despite all the warnings of quick and possible large losses, I forged ahead. I actually commented to my friends that this was like taking candy from a baby.

My first falter in options trading was to sell 20 contracts (uncovered calls) of Research in Motion (RIMM). For these contracts I received 1000 dollars, 50 cents a share. I therefore agreed to
sell 2000 shares of RIMM for 100 dollars a share, no matter what the going price above 100 dollars after the execution date in October 2006. When I sold the contracts the stock was going for 85 dollars a share. This had to be easy money, like taking candy from a baby!

The company came out with its earnings report four days after I sold the contracts. The report was good and the stock jumped to above 100 dollars the morning after the earnings report.
This put me at risk for a huge loss. On Sept 29, 2006, the contracts I sold for 50 cents a share were a big liability. I was lucky to buy them back for five dollars a share. This amounted to almost a 10,000 dollar loss. The night they came out with the earnings report, I couldn't sleep.
I worried about what was going to happen the next day. I was happy to buy the contracts back for five dollars a share. Eventually, the stock surged to above 300 dollars. Had that happened quickly, before I could react, I would have lost over 500,000 dollars. It still makes me sick to
think of how stupid I was to expose myself to such a possible loss.

My stupidity does not end here. I did not learn my lesson. I still thought I could beat the system. I experimented some more with options by selling puts on steel and railroads.

In the first six months of 2008, I was ahead over 20,000 dollars on a 100,000 dollar investment. The DOW was near 14,000 and I was riding high with my steel and railroads.
I began selling puts feverishly with no consideration of a huge slide in the stock market. Steel stocks dropped like a rock and left me with a huge problem.

Here is what happened to me, and I am certain the same thing probably happened to many other investors. I sold 51 contracts (puts) on U.S. Steel (X) for $1.45 per share with a strike price of 70 dollars with expiration of Jan 09. At this writing, it would cost me 50 dollars a share to buy back those puts. If I had held those contracts until now, I would be down nearly a quarter million dollars. Not good! No way I could come up with that kind of money. Once again I had escaped a possible huge loss. I saw that steel was dropping quickly, and after another night of worry, I bought the contracts back for 2 dollars a share. If the stock had dropped more rapidly,
I would not have been able to pay. The poor sucker that ended up with selling me the contracts at 2 bucks a share has to be hurting.

This story should have ended at this point, but NO! Around the same time (August 2008), I sold about 30 contracts (puts) on Arcelor Mittal (MT). I bought those back two weeks later
for a loss of about 10,000 dollars. If I were hung up for some reason and not been able to buy those contracts back quickly, I could have lost over 200 thousand dollars.

You are probably thinking "this could not happen to me". It can and it will if you don't pay close attention.

You are probably saying: "What an idiot". Yes, when you look it in retrospect, I am an idiot.
But six months before all this happened, I was riding high and 20,000 ahead. A once in a lifetime world-wide recession had hit.

No person could have convinced me that this could happen. Well, believe me it did happen and I wrote this to keep it from happening to you.