106% Return — I'm not good at this.

I’ll spare you the suspense.

I generated a 106% return on my banking crisis trade.

Although I was obviously happy with the outcome, this experimental trade shed some much-needed light on my trading “operations”.

Firstly, and this is not a humble brag, this result made it clear that trading quickly evolving events within the banking sector is not my forte.

The reality is that Prosperity Bancshares ($PB) were down 3-7% on Monday morning, and I likely could have exited the trade at a 3-5x return on my money; however, I have very little experience trading options with low volumes and so I was having difficulty exiting my position.

It wasn’t until my friend provided some much-needed education on evaluating option chains to find the correct?ask?price that would attract a buyer.

Since the volumes were so low and vol was so high, the bid-ask spread was wide. $0.70/bid and $4.30/ask. If you’re not familiar, this means there are active sell orders placed at $4.30 and active buy orders placed at $0.70. If I placed a market sell order, it would have executed immediately likely at $0.70 and lower. For context, I purchased my contracts at $0.62/share.

I knew the value was much higher than that so I kept placing sell orders just below the current $4.30 ask hoping someone would buy at that price… but received ZERO action – my ignorance was showing.

After a while of prices climbing back up, and option values decreasing, my friend took at look at the option chain and realized that the $50 strike price options, closer to being in the money than my $45 strike, were last sold for $1.80/share. Simultaneously, the $40 strike options (farther from the money), were selling for somewhere in the range of $0.70-$0.90/share.

Common sense told us we could price our option somewhere in between. That’s when we decided $1.30/share for roughly a 2x return made sense, and fairly soon after the sell order was placed our trade was executed at that price.

Poor execution, but a great learning experience.

In addition to my poor execution, my analysis of banks’ financials compared to other traders is unimpressive, to say the least.

Sure, I’m still confident that this bank’s balance sheet is weak given their insufficient deposit coverage and unrealized losses on the books, and sure I generated a good return, but a great trader would have bet against one of the 10+ bank stocks that plummeted more than 10% on Monday and would have generated a 10x or better return on their money.

Ultimately, I couldn’t figure out quickly enough why a handful of these banks (besides FRC) were moving so substantially compared to other regional banks with poor balance sheets, and this was a friendly reminder that I was likely the “fish” at the poker table.

You’re not going to win on every trade, in fact, some successful traders win less than 50% of the time, but not understanding the dynamics of why you lost on a trade is a big red flag.

Market Wizards

I’ve been reading a few?Market Wizards?books that tell the story of a variety of traders who’ve generated insane returns within both commodities and equities trading. One guy took a?$30k account and grew it to $80 million . I highly recommend the?audiobook ?because it’s a written interview so listens a lot like a podcast.

Anyways, the reason I bring it up is because there are a few consistent trends among the successful traders that he profiles. One is that they all find their niche or trading style, and they become masters at it.

It doesn’t mean you can’t trade a variety of industries or commodities or economic events BUT that sort of broad-based trading better be your competitive edge because you’re competing with the best and brightest investors in the world and against institutions that have millions of dollars of research data and teams to analyze the data.

For me, I do not have an edge in analyzing bank stocks, especially banks stocks that are undergoing one of the most volatile events in our history. I simply made money because overall volatility went up and thus, so did my options’ value. As my dad used to say, sometimes it’s better to be lucky than good.

That being said, I’m glad that I made money during my “education”, and I’m incorporating my lessons in to what I know best… deep value investing. (sorting through penny stocks or stocks that are heavily shorted)

Although I’m not a part of the Reddit community nor did I participate in the “meme stock” frenzy in 2021, one of my trading idols is Keith Gill. You may know him from his Reddit username of?DeepF***ingValue?or his YouTube account?Roaring Kitty ,?but he was the guy who made close to $40 million trading GameStop when it benefited from a short squeeze in 2021.

Although he may seem gimmicky from afar, Keith exemplifies deep value investing to the fullest, and I believe it’s one of the areas in which small individual traders can gain an edge.

There tend to be more opportunities for information advantages and contrarian bets when dealing with penny stocks or heavily shorted stocks likely due to the fact that they are not in the media spotlight and the markets are less efficient.

So, are you ready for the next Gamestop short-squeeze opportunity?

I’m currently looking at a few names that are heavily shorted that might present a good trading opportunity, and one of these stocks is Carvana.

I don’t want to leave you with a teaser, but my write-up on their stock won’t be ready until next week. Until then, keep an eye on the banking contagion spreading as it looks like Credit Suisse, the 45th largest bank in the world, is on the verge of bankruptcy.

2-year treasury yields fell at the quickest one-day pace since 1982 and the bond market is now pricing in a 1% rate cut by the end of 2023, in layman’s terms: the bond market thinks we’re headed for recession and the Fed will pause rate hikes due to cooling inflation and further cut rates as the economy begins to weaken.

Charts can be deceiving but it was hard to argue with the following tweet:

I’m predicting there will be a lot of movement after the Fed’s meeting on March 22nd depending on their decision to either cut, pause, or hike. I’ll let you know if I put on any trades to play this situation.

Graham, out.

This is not financial advice. The information provided here is for general informational purposes only and does not constitute financial, legal, or professional advice. Always do your own research and due diligence before making any investment decisions. The views and opinions expressed here are solely those of the author and do not reflect the views of my employers or any other organization. The information provided here is not intended to be a substitute for professional advice and should not be relied on as such. If you have any specific questions about any financial matter you should consult a licensed financial or legal professional.