Was this a sensible (paper) trade? or just luck?

RobSmith answered one year ago …

The bollinger bands part was a good use of one aspect of technical analysis. But it's impossible to overstate the value of synergy. You must take MANY indicators into consideration when it comes to TA, and use them in conjunction with one another. If they all agree, then you are good to go.

So I can definitely say you got lucky. Since you are very new to this you may not yet understand the risk that you are taking in return for the reward you might have received. Sure you made 60%. But you might have easily lost 60, 80 or 100%.

If you're going to trade options, you should trade options that expire at least 3 months after your anticipated exit (sale) of the option. You sohuld also buy in-the-money options whereas I see you bought an option with a strike price close to the price of the S&P500.

As an options expert, I can tell you that the option that you bought is actually the EXACT option (out of thousands to chose from) that I would have chose to sell short (bet against) if I wanted to take a bearish bet on the S&P at the time you made your trade. There are many great reasons for this that you may learn with some simple research. But the idea is that you have time value working against you in the worst possible way (which would have been working for me in the best possible way.) Reasons being:

1. Time value deteriorates the fastest as the expiration date nears. (the rate of "time decay" significantly accellerates over the last 3 months before expiration - hence my advice to only buy options that expire 3 months after your exit).

2. The at-the-money options (options with the strike price which is closest to the stock's, or in this case, index's price has the most "time value - aka. extrinsic value")

So effectively, what you did was take the risk of buying the option that - all things being equal - would have declined the fastest. All things being equal meaning, if the S&P500 was flat. But if the S&P500 declined, you would have been toast.

If you traded the more expensive in-the-money option, time decay has much less of an effect on your option. If you traded one that expired 4 months out, time decay would have much less effect on the price as well.

So while you may have profited this time, I would take the other side of that trade 10 times in a row, and at the end of the day (or year - whatever) I would take lots of money from you.

I hope this helps. If it's an answer you don't like, then just save it, and as you read more about options, you'll see how right I am. (But don't learn through experience if you decide not to take the advice.)