Welcome to the TradingMarkets Big Saturday Interview! This week, I am delighted to be joined by Billy Williams. Billy is a successful private trader who uses options to trade large, fast moves in individual stocks. What’s interesting is that rather than using spread strategies and paying close attention to the “greeks,” Billy simply buys call options. This is an approach that is deemed risky by many options professionals. But Billy is using a strategy that he says works well for him. In this interview, you will learn about how Billy is able to buy outright pulls and calls by using systematic methods to identify fast and immediate moves in individual stocks
Eddie Kwong: Billy, welcome to the Big Saturday Interview.
Billy Williams: Thank you. It’s a great pleasure to be here.
Eddie: Can you tell us a little about how you got started trading?
Billy: In high school I joined the Army. When I got out I was attending the University of Texas. I was pursuing a major in Finance, and when I was there, my roommate had seen a movie called Wall Street that really made an impression on him. At this time, his mom had helped him get a loan for $5000 to buy a car, and instead he was trading options with it. He was trying to explain to me what options were. It really perked my interest and that is when I really first started trading money in the market. Time went by, and Saddam Hussein invaded Kuwait and I got called into active service. When I got back, I had saved about $2500 in cash, and I decided to talk to my buddy and see if he could help me make money like he did.
“…I took my $2500 and ran it up to $40,000. I thought to myself that I was going to be a millionaire, and all I have to do is party…”
Eddie: What made you do that? Was he actually making money?
Billy: When I was away, he had made a lot of money by speculating in oil, because oil was just going through the roof. When I saw it, it was like a dollar sign that hit my eyes and I told myself that I had to figure out how to do this. I took my $2500 and ran it up to $40,000. I thought to myself that I was going to be a millionaire, and all I have to do is party. I had no system. I did this by trading options and orange juice.
Eddie: How did you make your trading decisions? What did you do to go from $2500 to $40,000?
Billy: Absolute luck of the Irish. I had no methodology at all.
The broker that my friend had been working with at that time was up at a pretty prestigious brokerage firm, and he had traded commodities for a long time. It was really based on his recommendation. So I kind of committed one of the big sins of trading. I was taking advice from somebody else.
“…So I started trading…full time, this was back in 1998…”
Eddie: How was the broker making his decisions?
Billy: Knowing what I know now, I think he was simply playing seasonality trends. I didn’t really care because I didn’t know anything. I took his advice, and things were rocking and rolling. Back then the day trading margin for the S&P was ridiculously low at $5000. It only gave us a point or two, but I would make about $500 if it just moved 1 point. So some days economic news would come out and I would score a point here and a point there and it would really add up. After I had made that kind of money, I thought my ship had come in and I was going to be bulletproof.
I ended up cashing it out and I had gone into business with someone. That was a big mistake, because the business went under and I lost everything. But I told myself that I had done this once, and I can do it again. I started to save some money and started to invest again. At the time I was living in South Texas and, I was right next to Star County. If you know anything about this place, it’s the poorest place in the country and you couldn’t even get a job with an education. I had left to go work with my father because he was sick, and he needed some help. I did what I had to do, and I got things rolling at the ranch, but I had decided I didn’t want to work for the family anymore. So I moved outside of Houston and got a job at a bank.
“…After a couple years of making money and losing money, I decided I really needed a new way to do this…I was really getting ready to quit…”
About that time I had read a book called How to Make Money in Stocks‘ by William O’Neil. I knew that this book could teach me how to make money in the stock market. Even though I knew it had a system that made sense, I couldn’t really wrap my brain around it. So I put it aside, and spent the next few years buying these Mickey Mouse courses that they advertise that don’t really teach you anything. So I eventually went back to O’Neil’s book and in the late nineties I started to trade. When I put my first trade in, my heart was beating so fast, I thought I was going to fall over dead of an aneurysm. The stock went up and I had made money on it. Around this time, I took a hiatus from where I was working by resigning under good terms. I moved in with my grandmother because I was the only relative in that area, and I wanted to help out and watch her.
So I started trading from there full time, this was back in 1998. Things really started to move at that time. It ended up that she was better off in an assisted living center. Of course, from there I moved out and started looking for a nicer area to live in. I found a place in the North side of Houston, where the nicer neighborhoods were coming in.
Even though I was trading full time, I always was kind of hyperactive, so I couldn’t stay there in front of a screen. I ended up getting a job at a car dealership, and I went through management training. When the market ended up correcting a couple years later, lot of the stocks I owned at the time…were getting killed. The lesson is, I knew how to call a bottom, but I didn’t really know when to get out. I didn’t have a set system.
“…I know that statistically, the more the market falls, the more of a violent reaction it is going to have to the upside.To date, I have only suffered one loss by scaling in in that fashion on the R5 system. …”
Eddie: Did you wind up losing all your money?
Billy: No, didn’t get crushed, but I did get a black eye by losing 30% of my portfolio. In hindsight, it was pretty good, considering others lost a lot more than that. About that time, my grandmother passes away and I got left a 50% ownership in the ranch, and the family had voted to sell it.
So I had this huge pile of money on my hands and I told myself that I really wanted to learn how to become a full time trader. But at the same time I told myself that I had too much time on my hands and I needed to do something to get some income coming in. So I went out and started a business and it ended up taking more time than I had anticipated. So within two years I read every book and looked at every course on trading. In 2002, I started to day trade the E-mini S&P.
Eddie: What was it like trading the E-minis…being in the midst of the bear market?
Billy: The ranges were a lot different from when I had first started trading with my $5000 on margin. I told myself I was a smart guy and I could figure this out, but in truth I really couldn’t. I was not emotionally prepared for this. The biggest mistake you can make when you first start trading is you make money. If you take a loss, there is a chance that you will do a lot better down the line. That’s not saying that if you make money immediately, that you can’t, but you probably have to go back and totally redo your psychology. So, as I was trading I would get mad that I was losing money, and I had a compulsion that I needed to make it back.
After a couple years of making money and losing money, I decided I really needed a new way to do this. I was really getting ready to quit, because I thought anyone can lose money, and I’m not making it. I bought a lot of courses and 80% of them weren’t doing anything. I had been involved with TradingMarkets for a while, so when the Swing Trading College came around, I thought it was too expensive and I didn’t want to get involved in it, but the more I started talking and attending more of the presentations of it, I decided I could give it a shot. It was my first exposure to a trading system that had statistical research. These were systematic, mechanical systems that were robust that had a long history to them. They were backed up by solid numbers and I am a numbers guy.
“…I knew Qualcomm was a solid company, so…I bought 10 option contracts. The next day it declined some more and I bought 10 more. The day after that it went lower and I bought 10 more. The fourth day it rebounded with positive earnings with a gap up, and I made a little over $7000…”
Eddie: How were you able to take a look at the statistical evidence and draw the conclusion that this was for real?
Billy: Well, I had a conversation with Larry Connors over the phone. He always made himself available to me. I then started to delve into it and understand that this is a mechanical system. It took me a while to wrap my brain around it, but he really introduced me to some good research that showed me when I take a trade that goes against me hard, I am OK with it because statistically this thing is going to stretch so much that it will snap back. A lot of the systems, like the R4 system, you will make a profit in 5 days, but if I hold a position for 10 days, there is a high probability that I will take a loss. So I won’t sit there and stay in the trade. I will put a time stop and move on to the next trade. I have also had situations where I have bought in after the market has declined sharply, and the next day it gets worse and keeps falling, so I just keep scaling in. I would never dream of doing that before. I know that statistically, the more the market falls, the more of a violent reaction it is going to have to the upside. To date I have only suffered one loss by scaling in in that fashion on the R5 system. They had given me a signal a couple of weeks back, and the S&P was below the 200-day moving average. Part of my plan is that if the S&P is not offering me a trade, I will look at another market, particularly the NASDAQ which was above the 200-day average. So using the NASDAQ futures options, I bought futures options and kept scaling into the loss that kept getting more and more extreme. But even when it snapped back I had only bought $12,000 worth of options and only had a $220 loss. However, if I had not kept scaling in, I would have lost much more.
Eddie: How has incorporating options into the signals you are getting been working for you?
Billy: It has been a good experience…With stock systems I only take long signals because statistically, you have more probability of success and a higher profit factor because of the market’s long bias. I have had positions that as they decline I have scaled in because I know what the numbers and I know the probability is and I know it will snap back. I had a situation with Qualcomm. I had a signal after a big gap down that I know everyone was scared to take. I knew Qualcomm was a solid company, so with some trepidation I bought 10 option contracts. The next day it declined some more and I bought 10 more. The day after that it went lower and I bought 10 more. The fourth day it rebounded with positive earnings with a gap up, and I made a little over $7000.
Eddie: Would you say you are using options to trade these systems more than you are trading the underlying stock?
Billy: Yes, I would say that is right.
Eddie: One major point I should interject is that we’re not recommending that any one necessarily use options in the way that you’re using them. The gains you’ll be talking about are impressive. But with options, the challenge goes a lot deeper than if you buy the underlying stock and there’s a learning curve. That said, Billy why don’t you walk us through a few of the trades you’ve done?
Editor’s Note: Billy uploaded some charts and provided some narration to walk us through each trade setup.
“…Stocks are like checkers, but options are like chess. You have a lot more flexibility in building positions in trading the options…”
Eddie: So you use systems which automate the buy and sell decisions. But do you use some discretion as well?
Billy: Correct, a good example of that is Google’s recent earnings release. Despite the decline before the release, I knew the earnings would be positive. Google is a company that everyone watches, and I knew just based on the number of eyes watching it, that the earnings report would make it move in extremes. I bought options in it that were selling for $18.60. When earnings were released the stock gapped up like 35 points. I hung on to the options for a few more days, and on Halloween I had sold out for $82.60. I achieved a 300% return. It is an example of a place that I would not have felt comfortable with buying a lot of stock based on the price alone. One thing I learned at the TradingMarkets Options College was how to be able to look at options and judge their volatility and to build a position around these important things. Stocks are like checkers, but options are like chess. You have a lot more flexibility in building positions in trading the options. The worst case scenario in options is that if the company files for bankruptcy or something terrible happens, the worst I can lose is the cost of the option.
Eddie: In trading options, do you look at variables beside the underlining stock? Things like premium, volatility, expiration month, and strike price?
Billy: Let me illustrate through an example of a trade I did about a week ago in Medtronic. When I first bought it, it was an R4 signal trading around $55.70. I know statistically that these trades take about 5 days, but they can take longer. When I get into the position I am prepared to hold it for 2 weeks even though I may sell it in 10 days if it doesn’t make a move in the direction I want it to go. With two weeks to go on expiration of the November option, I would look at the December options and buy an at-the-money call option, so the $55 call. I want to make sure I have at least two weeks of premium on it. That particular trade I exited and made a $640 profit. The one thing I like about this trading system is that you have all the numbers, so it helps you formulate a strategy around it. This allows you to rarely have a losing trade. I have probably only lost money on 2 options, and the losses were never more than $200.
“…I don’t believe in discretionary trading anymore…On a systematic trading system, you can use some discretion, but the system tells you that you need to do. “
Eddie: So it sounds you like try to get some time cushion in there and select your expiration month accordingly. But most of decision hinges upon the underlying making a fast move within a short period of time. And in order to execute properly from beginning to end you have to withstand some mental anguish along the way. Are there any traders or money managers you’ve learned your mental discipline from?
Billy: Paul Tudor Jones. I think he is the perfect iceman as far as trading. When everyone was selling and the market was diving on Black Monday he had actually gained 100% on his investments just off of that day. The more I get into trading, the more I appreciate the mental aspect of it. The traders who are able to keep their emotional discipline are the ones that rise to become the top traders.
Eddie: Now that you have experienced being a discretionary trader during your early days a trader…and lost a lot money. And then switched to trading systematically and started to see consistent success…can you explain to the folks reading this interview, what exactly in your mind constitutes a good trading method?
Billy: Based on my own psychology, it has to have a profit factor of 3:1 or better. It also has to have a 75% win to loss ratio or better. I am not interested in quantity of trades, but I am interested in quality of trades. I don’t believe in discretionary trading anymore. On a systematic trading system, you can use some discretion, but the system tells you what you need to do. For example, it will tell you to only scale in one time. But if the market keeps going lower, I know that this is overplayed and I have no problem to keep scaling in by reading the VIX and the market. So I think you can add elements of discretion to a viable system. But a pure discretionary trading method has never worked for me. I have read reports that 2 out of every 3 big money managers on Wall Street will trade a systematic trading process, and they last a lot longer than the ones that don’t. If you get a chance to interact with other traders you realize that none are smarter than you are, why can’t you then figure this out? When you get to look at some of their thought processes you can see what it is. Losing traders don’t look and make corrections on themselves. That Las Vegas mentality really doesn’t work.
I’ve always been fascinated with the mental and emotional aspect of trading. I think I link most of my progress with how much I have tried to grow in these areas myself. When I first attended the TradingMarkets Swing Trading College, I was losing money with the index systems because I would hesitate at the wrong times because I was so overwhelmed with the fear of losing money. Instead of waiting for my exit signals I would exit early and miss out on some good moves. I think that you can use a certain amount of discretion if you have the experience and/or know your systems inside and out like I try to do. Otherwise you act thinking your are using intelligent discretion in your decisions but, instead, you are letting fear and greed make unintelligent decisions for you.
“…The next day both stocks rallied and I got my exit signals, my wife is happy again and shopping for the house with a vengeance…”
Eddie: Billy, how does fear and greed mess traders up?
Billy: Fear and greed have their place in trading. In and of themselves they are not “bad” things. They are parts of us that actually have good intentions. If you do something stupid like not getting out of a trade because you are afraid to take a loss its because that fearful part of you doesn’t want you to lose your money and feel bad about yourself personally, for example, because you lost money. It may be trying to protect your self-esteem but it expresses itself irrationally by not getting out when you should.
Likewise, the greed part of you is trying to positively support you in making as much money as possible so you can take the kids to Disneyland, take the wife on the cruise she has dreamed of going on, or buying the home theatre system you want for your home for your family to enjoy. But if greed is too strong it causes you to stay in a trade too long or ignore your exits so you can just “make a little more” and you may lose whatever profit you made or worse it makes you stay in a trade to make back the money you lost in the past because it wants to support your self-esteem by helping to get your money back.
All traders play these games in their hearts and minds as we try to succeed at this game. And fear and greed can help but only in their proper context.
There was an interesting thing that happened this week with my wife. I had positions in BHI and HAL and she would come into my office every once in a while to peek over my shoulder and see what was going on. The last few months she has been more and more interested in what I do with my trading and likes to check and see what I am involved with.
On Oct. 15th, both stocks were still drifting in the morning and she walks in and asks what was happening. When I told her, she made a face and seemed antsy for something to happen. An hour later both stocks began to rally really hard and it looked as if they would signal exits if they held their highs till the end of the day. When she walked in and saw how much money was made she got really so excited. She became so happy and began to ask if she could get this or that for the house and I told her yes, of course she could get it, no problem. She left and she was busy going through catalogs and around lunch time she came back into my office to show me the stuff she picked out.
She glanced over at the monitor and saw that both stocks were now starting to drift lower. All the light in her eyes began to dim and she forgot about what she was going to show me and began to ask me why my positions were going down. I explained that I didn’t really know.
She walked out and then almost walked right back in and began to fire off questions like,” Don’t you have an exit? Why don’t you get out now? What’s making these stocks go down? Maybe you should get out now before something bad happens? Why don’t you sell some of your position and take some money out?” Etc., etc.
Both stocks sold off their highs and closed lower for the day and my wife was just crushed. She hardly spoke that day, you could see just how bad she felt. She was almost in tears. Later, I hugged her and explained that everything she was feeling I have felt. I think all traders have been there. She responded with, “I really hate trading. How can you stand it?”
The next day both stocks rallied and I got my exit signals, my wife is happy again and shopping for the house with a vengeance.
The moral of the story is if your looking for the market to make you happy or your happiness is dictated with how well your positions are going, you’re going to be in trouble. Again, you have to put everything in its proper context and take care of your own emotional well being to support you in whatever you do.
Now, I am not perfect and I am susceptible to emotional/mental extremes as the next guy but its my highest goal to put everything in it’s proper context and achieve better balance to help me with my trading and my life.
Eddie: Are there any books you’ve read that are especially helpful in getting a handle on this whole mental game of trading?
Billy: You know, the one book that I think of is Reminiscences of a Stock Operator. The more I go back and read it, I see that unless you are a trader, you can’t understand the emotional highs and lows that you go through. When I read that book, I started to read more about Jesse Livermore, and I found out the man suffered from manic depression. When he was on an emotional high, he could do no wrong. Even if he took a loss in a stock he would move on because he was just feeling too good. But when he was down, he could make $1 million in a day, but still feel lower than a snail. So for me the mental and emotional aspect of it came out. I told myself that if you can ever feel good about taking a loss, and not just throwing money away, then you should be able to simply brush it off. We all know you are going to take losses in this game, but when you start losing sleep over it, and you feel like you need to get back your money, then you are just simply setting yourself up. You don’t want to sit there and try to take out revenge in the market. That is where emotional discipline comes in and sticking to a trading plan. During my evolution during this whole thing, I have come to really respect that a lot. One of the things that I think is interesting about TradingMarkets, and why I like reading the articles, is that when you start reading about these professionals, you realize that these people really aren’t doing anything that is any smarter than you are. The thing about it is, to them it is just another trade. They know statistically they will come out ahead in the long term. When I was taking courses in the Swing Trading College, I was so overwhelmed and impressed with the statistics.
Eddie: What kind of long term plans do you have?
Billy: I think when I am psychologically and emotionally ready I will sell off my business and start to do this full time. Some goals are for me and my wife to be able to travel. We are expecting our first baby in February, and I have goals like putting aside a certain amount of money for him for his future, so he won’t have to start out with nothing like his parents did. We have also talked about buying a second home in the Philippines. Other than that, the real goal is to make enough money to be financial secure for the rest of our lives.
Eddie: Billy, I have enjoyed this immensely and I bet you and I could go on for another six hours. But I know you have to go off and do other stuff. Thanks for joining us today on TradingMarkets Big Saturday Interview.
Billy: Thanks, I really enjoyed this.
Editor’s Note: My hope is that you have learned something of value from this interview. I’d like to know your thoughts. Email me at email@example.com. And if you would like to suggest someone for me to interview, don’t hesitate to let me know.