Mean Reversion Trading: Generating Wealth in the Stock Market Using Options Spreads and Technical Analysis by Nishant Pant

Mean Reversion Trading: Generating Wealth in the Stock Market Using Options Spreads and Technical Analysis by Nishant Pant

Chapter 1 - My Trading Journey
“It does not matter how slowly you go as long as you do not stop”
– Confucius
Who is Bill?
Twenty years ago, my wife and I were still new in the U.S. and were
learning the western culture and style of living. My wife used to work in a
mail center where you could go and ship packages. I was a software
engineer, absolutely in love with my job and doing great for myself. My
office used to be ½ a mile from where she was, so I would go and have
lunch with her every day. In fact, many of her customers thought that I
worked there full-time.
Every day when I went to her store, a gentleman named Bill would drop
by. We used to have long chats about living in America, cultural differences
between India and western countries, and everything else. Since I was
extremely passionate about technology, I read about tech companies like
Apple, Facebook, Google, etc., all the time. I would sometimes share with
Bill what they were up to and what new and cool piece of technology was
about to be released. What I found really interesting was that whenever I
would mention a company name to Bill, he always knew about the
company and what they were doing. His breadth of knowledge of
companies, not only in the U.S. but all over the world, was quite
impressive. If I told him, “Hey Bill, do you know there is a company called
Tata Motors in India which is like Toyota here?” he would respond with,
“Oh! Do you mean TTM? I used to own some shares in that company.” It
felt like he knew every company in the world by its stock ticker.
Conversations with him would flow from one company to another, and he
would mention how much money he made by buying shares of some
company or shorting another over-valued company. Since I had a rewarding
job at that time, I wasn’t looking to make money in stocks. However, Bill’s
all-encompassing knowledge really inspired me, and the thoughts of
growing wiser as I grew older planted the first seeds of getting into the
stock market.
Buying and Selling Shares
I started out buying and selling shares like everybody else and quickly
realized that I needed a massive amount of capital to make any decent
amount of returns. The Amazons, the Googles, and the Booking Holdings
were all trading upwards of $500 per share, and it was impossible for a
small guy to put up that amount of money and still not be able to afford
even ten shares! I was in my 20s, and I didn’t have Bill’s experience,
knowledge, or money to buy shares and hold them for ten years to see
returns on my investment.
Introduction to the world of options
I had never heard of terms like risk management, stop losses, defined
risk trades, fixed profit targets, stock market corrections, etc. I wasn’t even
sure what the S&P 500 was! Like many other young aspiring traders, I
started buying stocks with the price in the $1 - $10 range because that was
all I could afford then. Stocks in that price range suffer from many evils.
Lack of liquidity, price manipulation, unstable companies, and a host of
other problems plague low-priced cheap stocks. My sister, who has an
MBA in finance, used to tell me that I should stay away from low-priced
companies and only invest in well-established blue-chip companies. I was
left wondering how an average Joe could participate in the stocks of these
high flier companies without the need to risk tens of thousands of dollars
per trade. Maybe the stock market was a game reserved only for the rich
folks.
While trading shares, I kept coming across articles on investing sites
that would talk about trade ideas using options. It really intrigued me
because the returns that were being projected were disproportionately
higher than what you would get if you executed a similar strategy with
stocks. And the best part was that many of those trade ideas only required
one to put up a few hundred dollars of capital investment. It sounded too
good to be true, so I decided to educate myself. Having an engineering
background and a voracious appetite for reading, I started out very
methodically. I read approximately 60 books about the stock market in
general, DOW Theory, Options Trading, and Technical Analysis in 6
months.

Mean Reversion Trading: Generating Wealth in the Stock Market Using Options Spreads and Technical Analysis by Nishant Pant