I want to talk about what to do when a trade goes against you.
This is the second part, already in the previous article, I talked about a trade that went against me.
I talked about the plan, and right now, I want to show you exactly what I did today, which is the next trading day in order to hopefully rescue this trade.
Managing Losing Trades Recap
First of all, let me briefly recap the trade. I sold puts on Hertz. The idea was that Hertz stays above $3.50.
If Hertz would stay above $3.50 until May 15th I would collect $875 in premium.
Now, since this is only a few days away, it will be a little bit more than $100 a day.
And this is what I’m looking for, this is my goal with this account that I use here for trading put options.
I want to show you exactly where I entered this trade on this day right here where you see this huge bar down.
Now, here’s what happened.
I entered this trade shortly before it went way down. When I entered the trade everything looked great.
But then 10 minutes later, all hell broke loose. Ten minutes later, there were rumors of bankruptcy that Hertz might go bankrupt.
And right now, as you can see, Hertz is trading at $3.59 right at my strike price.
Now, if Hertz closes below $3.50, I’ll lose money.
In the previous article, this is where I told you exactly my plan and what I’m going to do. And now I’ll show you what I did here today.
The Steps I Took To Manage This Trade
Here is where you see my trades.
- I’m in an American Airlines trade right now going against me, but really not a big deal
- We talked about this Hertz trade
- NYOK, this trade is still going okay
- SPCE, this trade is doing really well
- …and now you see a second Hertz Trade
What is this, what happened, and what did I do? So here’s what happened.
As you know, Hertz dropped, and today I decided to buy buy the contracts I sold.
Looking at the account you’ll see exactly what I’m doing so if you find yourself in this situation, you’ll know what to do.
I want you to see how I think, and I hope that helps you in managing losing trades because the losses are happening.
So to get out of the trade, I had to pay $1.30/contract, and since I had 25 of these, this was a loss of $3,250.
Now, keep in mind, earlier I already received the premium of $875 so this means that today I would sit at a loss of $2,375.
That’s not nice. I mean, come on, I do not want to sit on a loss of $2,375.
Now admitted, it’s not a big deal. This account that I’m trading here has $35,000 in it so this is not really a big deal.
However, I want to show you exactly what I did instead to hopefully salvage the trade.
Next, I sold the $2 put and I sold it at $0.60. And I traded 55 contracts. So today I received a premium of $3,300.
So here is what’s happening right now. As long as Hertz stays above $2, I will now keep the whole premium of $3,300.
Let me show you exactly on the chart what this looks like.
I lowered my threshold where I said, “Ah, Hertz cannot, or should not go below $3.50.” Now I got rid of this and I moved it down to $2.
By doing so, temporarily today, I had a loss of $2,375, but if Hertz stays above $2 until May 15, I will keep $3,300 from the $2 put I sold.
So this means that, yes, I did lose some money, but I’m trying to keep the $3,300, so overall, my profit will be around $1,000.
You get the idea, right?
So right now, switching back to the account, you see I closed out this trade and the realized loss is $2,400.
Why is it $2,400 didn’t I just say it is $2,375? Yes, the broker is rounding it.
But you see, this is what happened right now.
At the same time, you see here I sold 55 of the $2 put, and right now I received $3,300 in premium.
So as long as Hertz stays above the $2, I’m fine.
Here Is The Important Thing
Why did I do this?
So there are two main reasons why I did it.
Reason number one, I still believe that even though they’re talking about bankruptcy in Hertz, that Hertz will have a quick pop.
When they do this, the trade will be fine. And I also lowered my break-even from $3.50 To $2, right?
I also sold enough contracts so that I am able to cover the loss that I realized today and possibly even turn this into a gain.
It seems that possibly even turn this into a larger gain than I originally anticipated.
Because originally I thought I would only make $875 on this trade.
Right now it seems that I can make over $1,000 on the trade, and all that Hertz needs to do is stay above $2 before and on May 15th.
3 Days Later
Now, for the past three days, Hertz was nicely staying above $2.
And here’s what happened today.
So today I saw that I had an opportunity to realize $2,700 in profits.
Now as you recall, I lost on Monday $2,375. So when today I saw, oh, my gosh, I can get out of this trade before it gets worse, I’ll do this.
So the question now is, why wouldn’t I wait until expiration? Let’s go back to this. So expiration of this particular trade is on May 15th.
Today is May 7th so we have another whole week of trading before the contracts expires.
Now during this time a lot of things can happen. Hertz is right now talking with creditors and is trying to avoid bankruptcy.
But if these talks go sour, this stock might plummet below $2.
So at this point, I don’t want to stay in this stock. This is something that I didn’t want to be in.
Again, I entered the trade, and shortly after I entered, 10 minutes later, Hertz said, “All right, we’re missing payments and we are considering bankruptcy.”
So this was a rescue mission. And at this point, I’m not getting greedy because what could happen? Yes, I could potentially make another $600.
But, hey, as you can see, I already made some money. I made a little bit over $300 on this trade that just a few days ago was a heavy loss of $2,700.
So turning a loss, a potential loss, of $2,375 into a gain of a little bit over $300. You know what? That’s good enough for me.
So I closed out the trade today, I bought back the put that I sold, and now I can get rid of the trade and I don’t have to worry about it anymore.
Trading Futures, options on futures and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. The lower the day trade margin, the higher the leverage and riskier the trade. Leverage can work for you as well as against you; it magnifies gains as well as losses. Past performance is not necessarily indicative of future results.