Interview with Shirley | Nearly 10000% Gains in One Night

Hi Tigers,

Welcome to our Interview with Shirley, a Tiger from China @阳光彩虹派

With 8-year investments experience, Shirley initially focused on commercial real estate investment and then transitioned to primary market equity investment.

Interested in near-term options, Shirley saw a near 100x surge in her most successful trade involving $Merck(MRK)$.

Let’s learn about Shirley’s real life experience about 10000% surge in options and her trading habits in this interview!

1. What's your investing background?

This year marks my 8th year as a “Tiger". Originally, I was primarily involved in commercial real estate investment, but this year I transitioned to primary market equity investment. The simultaneous linkage of the primary and secondary markets has always been my dream.

2. What's your most profitable or successful trade?

In my 8 years of investing, my most successful trade came from pharmaceutical stock $Merck(MRK)$ . In January 2018, due to unexpected positive news, the call option for that stock surged nearly 100 times in value overnight.

Screenshot at that night

3. Do you remember how you made the decision on the trade? Any reasons?

I believe a significant part of it was luck or opportunity. I've always believed that opportunity favors the prepared mind.

Because my father is a doctor, I had some familiarity with the world's largest pharmaceutical company, $Merck(MRK)$ . At the time, I noticed that its Implied Volatility (IV) was very low, with a volatility of less than 10%.

On Wednesday, I invested $200 in out-of-the-money call options that were just a few cents. Unexpectedly, due to the surge in positive news on Friday, the option value peaked at nearly 100 times my investment. I made almost $20,000. The happiness and excitement is unforgettable.

4. How did you choose the strike price and expiration date? Can you share your trading plans for MRK at that time?

At that time, I didn't have a specific trading plan, but I generally preferred trading near-term options (options expiring soon). However, I always controlled my position to be within $500 (even if it went to zero, the risk was manageable).

Since MRK had been on my watchlist, and I observed that the IV was at a historical low point and the option prices were cheap, I decided to give it a try. I bought the options on Wednesday, and they dropped on Thursday, but since I had only invested $200, I was mentally prepared for the possibility of losing it all. Unexpectedly, there was a massive surge in the stock on Friday's opening.

In summary, it was a combination of luck, a positive mindset, and continuous observation and tracking.

Looking back, I sometimes regret not going all-in at that time and potentially becoming wealthy overnight.

5. Why do you care about IV? What make you decide to buy the call?

In general, when IV is low, it indicates that if the stock price experiences significant volatility, the returns on near-term options can be substantial.

However, IV alone isn't enough; it needs to be considered alongside the stock's inherent volatility.

For example, stocks with high volatility like $Tesla Motors(TSLA)$ and $NVIDIA Corp(NVDA)$ tend to have higher IV compared to others like $Alphabet(GOOG)$, $Apple(AAPL)$ or many pharmaceutical stocks.

Additionally, if a stock is about to release its earnings report, the IV is likely to be much higher than usual. It's important to take a comprehensive approach and not solely rely on IV as a deciding factor for entering a trade. For stocks I'm familiar with, I track them for the long term and consider entering when I believe the IV is relatively low based on their historical behavior.

6. Do you think this most successful trade can be replicated?

It's difficult to replicate. That trade was a combination of timing (buying when both IV and price were low), favorable circumstances (sudden positive news), and the right mindset (being prepared for the possibility of losing it all).

In my 8 years of trading U.S. stocks, I might have traded many options that doubled or had even greater gains, but the opportunity for a 100x return is quite rare. There's a greater risk of losing it all in such scenarios.

7. Which sectors and stocks have you been paying attention to recently? How do you view the current market volatility?

I'm still bullish on $NVIDIA Corp(NVDA)$ (NVDA) and $Tesla Motors(TSLA)$ for the long term. However, Nvidia has risen quite high recently, so I don't recommend chasing the high. It might be better to wait for a pullback before entering a position.

I've always had a lot of confidence in Musk's team's innovation ability, so I hold on to my positions for the long term and buy more on dips.

I feel that even the prospects of rate hikes and economic downturns haven't suppressed the high momentum of the U.S. stock market, so there's a high likelihood that the market will continue to rise.

8. Can you give other tigers advice on trading habits?

I'd like to share a few trading habits that I find effective:

a. Consistently review the market every day

No matter how busy my work is, I always set aside at least half an hour to study. This includes browsing financial news and checking if there are any important data releases for the day (such as jobless claims, monthly CPI data, non-farm payroll data, etc.). These data releases often bring significant market volatility. The secondary market is ever-changing, and staying informed about macro trends allows for more accurate predictions.

b. Track stocks I frequently trade for the long term

As mentioned earlier, I trade stocks like Merck, Tesla, Nvidia, and Amazon. The advantage of long-term tracking is that you develop a clearer understanding of various indicators for those assets, leading to higher trading success rates.

Strictly control option positions

Over the years, I've fallen into many pits, especially with near-term options. If you don't control your position well, you could lose everything overnight. Therefore, I now limit my near-term option positions to $500 or less, and I only go heavy on longer-term options (more than 3 months out). This way, even if I'm wrong in my directional judgment, I can still preserve most of my capital.

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