Recover bad trade stock options
This stock is not trending. It is chopping around in a random fashion. Hence, it is tough to predict. Trading is about forecasting the outcome and in this case, SHLD is a coin toss. Look for stocks that are trading in a very orderly manner. Know in advance when you will get out of the trade. You should have specific price levels for both the target and stop.
You should also identify the time horizon of the trade. If I am considering a month trade, I will scale in and average my price.
If the stock has not made a constructive move in 6 weeks, I may time-stop the trade. I did the trade because I expected an immediate move. If it does not happen in a few days I may cut and run. If you are wrong, get out, learn from your mistakes and move on. In the case of SHLD, you might have taken in some premium by creating a diagonal spread sell front month out of the money options against the Feb put , but it would have only softened the blow.
You would have lost less if you sold the Feb puts at points 1,2 or 3. Spreads are great strategies, but they should be a part of the original game plan. You are fighting the market. The trend has been up and you are buying puts. If you are on the wrong side, you will lose money on 3 out of 4 trades. I have been losing money on puts during the last few months, but they have been a hedge for my larger position.
If they are not, hopefully your long call positions are offsetting the cost of your hedge. Before you can get long puts, this market will need to violate the major trendlines and horizontal support levels. It is very strong and you should not try to fight the trend.
You should also take a look at the sector the stock belongs to. Bring up a chart of the RTH - it is in a very strong trend. In the meantime, find a sector you do like and get long. The market is giving you a chance to salvage the trade. I would not spread it, I would get out. They happen all the time. Just make sure you learn from your mistakes. You might consider reading my articles on how I trade options.
The option strategy is a function of your opinion and confidence. For example the WMT 30 call. With WMT at 56, the call is about 27, or about half the stock price. I know call buying has risk, but this seems no more risky than buying stock.
Am I missing something here? The down side is the same as owning the stock - initially. As the stock drops, the options will gain implied volatility and the risk of holding the options will be lower than the risk of owning the stock.
On the flip side, the options will gain point for point with the underlying stock as it goes up. This is true because they are trading at parity. This is more a question than a comment.. I am nairly new at trading options. I have had my ups and downs making money.. I simply buy and sell puts and calls… My question is this..
The very next day the stock price moved to about and my option moved up about. Here I am today Monday Nov. CME stock price has jumped and hit a high of Yet my DEC call has now fallen to 2. Can you explain to me how this can be.
When such a scenario does arise, the important thing is to try and minimize the impact of the unexpected loss. On this page we look at what can be done when a stock investment goes bad, and specifically how options can be used to help repair a bad stock trade. The stock repair strategy was named as such because of the fact that it basically repairs, or fixes, a trade that is broken. It's a simple options trading strategy that is used to make it easier to recover when a long stock position has resulted in losses due to a drop in the price of the stock, and it's an excellent alternative to some of the other methods that can be used when losing money from a trade.
There are two main advantages of using this strategy: There are only two transactions involved; you need to buy enough at the money call options to cover the amount of stock owned and then write twice as many as out of the money calls. More details on exactly how to use this strategy are further down this page. Typically, an investor would consider three possible actions following an unexpected drop in the price of stock they owned: The first of these, simply cutting losses by selling and moving on, is a far from ideal solution, particularly if the losses are significant.
This is sometimes the only sensible solution if the stock is unlikely to recover. The second possible action, investing more capital to reduce the average cost per share, can be effective in the right circumstances. However, there's always the risk that it's simply throwing good money after bad.
The third possibility is holding on to the stock until the position breaks even, but this can take a long time and may not even happen at all. The repair strategy offers a number of benefits and should be considered over the above methods for a number of reasons.
For one thing, it doesn't require any additional risk, unlike investing more money to reduce the average cost per share. This is particularly useful if you aren't completely confident that the stock will start to rally and increase in price again.
Also, because the strategy reduces the break-even point of the original trade, it's a very effective way to recover losses more quickly than might otherwise be possible if you simply left the position open and hoped that the price comes all the way back to the point that it was purchased.
If you expected the stock to continue to fall, then you would probably be better off cutting your losses. If you do expect that the price will rise again, then the this strategy is very much one that you should think about using.