But losses can be crushing, too. Options are often referred to as “wasting assets.” As noted earlier, their value declines as they approach their expiration date. Unlike stocks, which likely will decline only to the breakup value of a company, an option becomes utterly worthless once it expires. In theory, most options traders exit their long positions well before this happens. This is done simply by selling the call options they’ve purchased. But sudden market shifts can still wreak swift and terrible damage to an options portfolio. Lo was about to spend $100,000 on a wasting asset, the equivalent of a high-stakes bet at a baccarat table.
Her strategy remained fairly fluid. She bought the call options with strike prices more or less level with the OEX’s current price, or “at the money,” as this is called. The expiration normally would be 4-6 weeks from the date she purchased the option. The near-term expiration in particular minimized any time premium she’d have to pay. Alternately, by purchasing options at the money, she could exit a position without losing too great a percentage of the option’s value.
Lo usually held on to her positions for a couple of weeks before selling. And she used daily charts to gauge where she thought the index was heading near-term in order to time her buys and sells effectively. “I used a 30-day moving average,” she says. “Although I didn’t really pay much attention to that either. I would watch TV and talk to the other traders at the firm.”
Even so, she says, “You never really knew what was going to happen. So long as the market was heading in the direction that I wanted, I would hold on to the option. If it had a couple of bad days, I would just get out.” Her positions were highly concentrated, which meant that any move up or down would radically change her net worth. More cautious traders might have taken a portion of their gains and set them aside. But Lo saw this as her chance at a big-league score. And as the market rose, so did the amount she wagered. “I was trading ever-larger amounts,” she says. “Because you had to hold these positions for days on end, every piece of economic news and data set me on edge. It was just horrible. I’d never endured anything like this in my life.”
When the market corrected in July, Lo somehow managed to escape. She bought more options later on in July. Sold these soon after at a profit. And leaped back into the market in the fall, still betting ever-larger amounts. All the while she was aware that the July correction had planted seeds of doubt.
“This is what finally did me in, and why I don’t trade very aggressively any more,” she says. “July was the craziest month – the huge crash. And every month after that, it was going straight up. But it looked so tenuous. So it was terribly stressful. Between the July lows and the December highs, it would go up for a few days and then chop for a week.”
Throughout the fall it was rare for Lo to get a good night’s sleep. Everything she had learned as a trader told her that parabolic bubbles climb via a series of steep steps before reaching a top. Thus her trading account fluctuated by thousands each day as the market chopped. But as the market shot up, so did her net worth. And now it hovered precariously close to the seven-figure mark. Regardless, knowing when the final top arrives during a parabolic event is especially critical, since the fall-off that follows is far steeper than the long climb to the top. A fall-off could occur in a day. Any day.
Thinking back on it now, she vividly remembers Canaccord’s annual Christmas party, held during the first week of December. “I wasn’t drinking because I had to trade all the time,” she says. “I became so obsessed with watching the market that I left the party two or three times to go upstairs. And I would watch the ticker, even though I couldn’t trade overnight. The market would be down 20 points, and I thought, ‘Oh my God.’”
All or nothing
For some reason, on New Year’s Eve 1996, all the stress came to a head. “My sister was coming to visit,” she remembers. “I had tickets for a New Year’s Eve performance of the Three Tenors. I had bought tickets for my boyfriend, my mom, my sister and her boyfriend, and myself. They were $1,500 apiece. It had been a particularly horrible expiration the week before. And I was still wound up.”
Lo remembers coming home to cook dinner. And then the taxi ride to the performance. As everyone settled into their seats at the concert, she spotted some of the people she worked at Canaccord. Suddenly the room began to spin. Her hands started to shake, and her heart pounded. She ended up having to leave before the concert even started.
That night and in the days that followed, Lo started coming to grips with all that had happened to her during 1996. The year had begun with the death of her half-sister and ended with Lo taking by far the biggest risk of her trading career. “It had been a whole year of doing really dangerous things, “she says. “I looked back and I thought, ‘A year ago, when you came back from the funeral you had 20 grand, and look at this ... a million dollars.’ And oh my God look at the risks I took to do it. What if it never worked out? I danced through a minefield for a whole year.”
Ask her why she took such a huge risk, and why she didn’t set a portion of her profits aside instead of letting the bet ride even as it grew progressively larger, and Lo will answer without hesitation. “Because to me, having 20 grand was the same as having nothing.”
Daily rewards
Which doesn’t mean the costs of that year haven’t left their mark. Some months later, Lo left Canaccord and resolved to trade on her own. The idea for her Web site, The Intelligent Speculator, came about after she had sat in on several other online chat rooms. But for a variety of reasons she wound up not liking them. The Intelligent Speculator would be intended as a hangout for experienced traders like herself who were adept at reading trend lines and candlestick charts.
Indeed, after all the wildness and chaos that occurred in 1996, Teresa Lo now strictly limits herself to day trading. The S&P e-minis (or futures contracts) she now trades exclusively are similar to options in that they provide considerable leverage. Because S&P e-minis track an index, they tend to move continually in price. In fact, their short-term volatility is far greater than popular exchange-traded funds such as “Cubes” (QQQ), which track the NASDAQ 100. Because of this, Lo and her fellow traders at The Intelligent Speculator are able to exploit the contracts’ volatility at numerous times during the day. Lo herself makes about three round-trip trades daily.
E-minis trade over a direct matching network called Globex2. This system, similar to electronic communications networks for stocks such as Island.com, provides enough liquidity for her to readily exit positions the instant the charts show that the market is moving against her.
Meanwhile, the bulk of her wealth is safely ensconced in T-bills. “People think day trading is glamorous and exciting. But it’s really the last stop before you quit trading altogether. Usually you’re so risk adverse that you only hold positions over 10 minutes or so. Once you’ve been in battle for so long and you’ve seen so many terrible things happen, you really don’t want it to happen to you again.”
Trading S&P e-minis online while she instructs both beginning and advanced traders, Lo has her methodology down to a science. “I use a 20-period exponential moving average (EMA) on the 15-minute chart,” she says. “A lot of people use the 20-period EMA. So I just watch the bars because I know what they’re going to do.
“I’m certainly a much better technical trader now than I’ve ever been. So I don’t have to take big risks. There’s only so much the human psyche can take,” she says. “It’s all relative. It’s not whether