My (brief) experience with day-trading
On February 19, 2020, the S&P 500 hit a (at the time) record high close of 3386.15. COVID-19 had already spread globally at that point, but the extent of the crisis had not yet been felt in the financial markets.
We all know what happened next. Optimism turned into fear overnight. A massive equities sell-off ensued, driven in part by concerns that the markets were already overvalued and further fueled by panic about COVID’s potential to wreak havoc on the economy for months, if not years, as the first stay-at-home orders came rolling in. The ensuing decline was incredibly precipitous - by March 16, 2020, the S&P 500 bottomed out at 2386.13, wiping out 30% of its previous value in less than 4 weeks.
Several of my friends, who were recent or first-time investors, were so spooked by this that they stopped investing entirely. It is gut-wrenching to open your portfolio and watch your portfolio value plummet by hundreds or thousands of dollars daily. The larger your portfolio was, the more eye-watering your losses were. The right course of action, for a long-term, passive investor, is to not check your portfolio daily, because if you are investing for 30 years, just trust the process and stay the course. The only people who actually lost money were those who sold assets at a loss, turning “unrealized” losses into real ones, due to a belief that if they didn’t abandon ship fast enough, they would lose it all. The market crashes in 2000 and 2008 were far worse, but time has a way of dulling past events and an entire generation of new investors have never lived through a significant downturn (some would argue that we still haven’t).
Of course, it is easy in retrospect to say that staying the course worked out pretty well. I would be dishonest if I said that I wasn’t unnerved and concerned. I didn’t know where the bottom would be. I thought the S&P 500 might drop as low as 1500 and stay there for months. But for a variety of reasons, the markets recovered and on August 18, 2020, the S&P 500 closed at 3389.78, eclipsing its previous peak. By December 2020, the S&P 500 ended up about 16% for the year. Once again, there is talk that the markets are overvalued and heading towards another bubble.
This is a long-winded way of saying that in March, I decided to try some day-trading for the first time.
I “stayed the course” in my existing index funds, but I was so dismayed by the daily market decline that I wanted to try to mitigate it with some day-trading profits. This also coincided with a canceled business conference in March due to COVID, which left me at home for a week with nothing to do. Finally, a friend of mine was making good money by betting against the market.
I’m sure there are multiple ways to make money during a market decline, but the methods I knew of were shorts, inverse ETFs and put options. I immediately ruled out short selling because the potential downside is limitless. My main brokerage is Fidelity. By default, Fidelity accounts are not allowed to trade options, so I had to request this privilege. Fidelity implements this safeguard to prevent novices from trading options because options can be incredibly complex and carry significant risk of loss. I had no experience with trading options and indicated as such in my request. However, Fidelity granted my request a few days later, likely because I had significant portfolio value (therefore, presumably I can withstand large losses… the same logic applies to being an accredited investor; weird flex, I know). I could have jumped into options trading faster with a platform such as Robinhood, but one of my friends had just ditched Robinhood due to a variety of problems, including one infamous day in March when traders were locked out of their accounts.
Let’s see how I did:
Screenshot from Fidelity Active Trader Pro.
I used $40,000 of extra cash to trade with. The above summary represents all of the trades that were made. In other words, I did not buy $81,694 of SPXU all at once and sell it for $84,541. Rather, those numbers represent the totality of my SPXU trades over about a month.
While I waited for approval to trade options, I mostly bought and sold SPXU, a triple-leveraged inverse S&P 500 ETF. Basically, an inverse S&P 500 ETF trends in the opposite direction of the S&P 500 itself. So if the S&P 500 declines by 5%, the inverse ETF gains 5%. A leveraged ETF uses leverage (borrowing money) to amplify the movement of the index, so if the S&P 500 declines by 5%, the triple-leveraged inverse ETF gains 15% (in theory). I also bought and sold UPRO, which is a triple-leveraged S&P 500 ETF (non-inverse). These types of ETFs tend to have significant tracking error, but that’s the basic gist of what they do. Leveraged ETFs also suffer from volatility decay, which is its own topic.
Once I was approved to trade options, I started trading puts. I bought puts in SPY, which is a popular S&P 500 ETF due to my belief the market would keep falling. I was extremely tentative with my options, buying only 1 or 2 contracts at a time. Unfortunately, my puts were bought after March 16 and had expirations in late April or early May. Unbeknownst to me, the market had already bottomed out. It would fall no further. Spooked by a resilient market and with all options getting closer to expiration daily, I exited most of my options with relatively little gains. I held on to a few puts for too long, and they expired valueless with almost complete loss of premium. Overall, I lost money trading options for 2 main reasons:
I didn’t really know what I was doing, I had no real strategy in mind, except an idea that that the S&P 500 would keep falling until May or June and I wanted to make some money in a market decline.
I only started buying SPY puts after March 16 but the bottom had already come and gone. SPY never hit a price of 220, so the SPY 220 puts, which I already bought at the bottom, were doomed almost from the start. People who bought puts before then did make a lot of money. But this was a classic case of making poor decisions and rushing to the latest fad out of a fear of missing out, only to be late to the party.
I quickly abandoned puts and made some final trades in UPRO as the recovery began. I could have also bought SPY calls, but at this point I was very unsure of what the market would do. I thought that maybe the market recovery was just a “dead cat bounce”. If I bought calls and the markets fell again, my calls would be wiped out as well. Part of the immense difficulty in trading options is that you need to predict both the direction of movement and get the timing window correct. In retrospect, I could have also held on to UPRO for longer, but again, I was fearful of another decline as well as volatility decay.
All of my trades were associated with the S&P 500. I did not have the time, inclination, or knowledge to trade individual stocks or stock options. I think doing so comfortably requires much more research.
My gains trading the ETFs did offset my options losses. You’ll notice that the end tally comes to $1441.21 in profits after about 1 month of tentative day-trading. As mentioned I used a total of $40,000 of extra cash to trade with, so this represents a little over 3% gains in 1 month. I told myself at the beginning that I viewed day trading as gambling and that I was fully prepared to lose all of the money. In the end, I discovered that I was much less willing to accept trading losses than I originally believed. I did not feel that my gains were sustainable, nor did I feel that the risk was tolerable.
By the way, savvy (or lucky) traders could have easily turned $40,000 into millions. If I had bought $40,000 worth of SPY puts before February 19th (depending on which puts were bought; some puts could have been bought for pennies), I could have made millions. For that matter, $40,000 in Tesla (TSLA) stock purchased on February 19th would be worth over $140,000 by end of December. And $40,000 in bitcoin (BTC-US) would be worth about $100,000. It’s incredibly trivial to retrospectively identify actions that would have made huge gains. In fact, I can just as easily tell you what yesterday’s winning lottery numbers were. Unfortunately, I am not gifted with clairvoyance into the future. I don’t want to discount the element of skill and strategy in successful day-trading, but I do think that if you are a working professional with a full-time job, it is unlikely that you’ll find prolonged success day-trading on the side. It’s like playing pick-up basketball with your friends thinking you can take on Lebron James.
When (not if) the markets experience another period of severe volatility in the future, will I return to trying day-trading? Perhaps. The potential gains are so great as to be almost irresistible. Perhaps I’ll do better next time with some more preparation and experience, but likely not. I recently read some surprising statistics about day-trading, such as only 1% of all day-traders are able to profit net of fees. In the end, I personally view day-trading as just a trip to the casino, and this is why the vast majority of my real investments are still in passive index funds.
Happy investing!
