Cutting Losses on IWM and Ford PUTS — June 2 Trade Log

The trading session today was full of lessons, we took great losses as the market continued its everlasting rally, but the way we see it, every loss teaches us something valuable and that was the case for today; we did not make massive gains today but we were still happy at the closing bell.

Out of all our positions we had 2 contracts going against the current of the market, we held them for longer than what we should have and it definitely reflected once we sold them. We lost more than 50% of the original value of the contracts on both these trades, this could have been a lot less but our stubbornness and insecurity drove us to taking more significant losses.

Trading on hope is something really dumb, even more when talking about short trades, timing is of essence and as we have said before, swimming against the current most of the time means drowning, which in this case means losing the trade. We had been really persistent with the IWM PUT contract and we even rolled over the last contract we had on vain hopes that the market would correct, the play was not smart and we sure did pay for it. A net loss of $126.

The Ford contract was a peculiar case, the “small” amount which we were not worried about had increased day by day and the lack of attention we gave this contract also made us pay. We had a winning streak with Ford contracts, for us it had been rare to lose money playing this stock, when we finally did the amount did not scare us and we were too patient, we saw this contract losing day after day and never really took the decision of cutting losses. Finally today we took the decision and got rid of it, a net loss of $55.

AMAT October 16 2020 $72.5 CALL

After a while of leaving this underlying untouched we once again entered to play.

In the graph above we can see that after the March lows the stock reached the 200SMA (blue curve) pretty quickly and wasn’t able to cross it until the end of May, after this it consolidated above it and sustained with an acceptable volume. Since the overall market is bullish and the stock consolidated above the 200SMA we thought it would be smart to buy a CALL, volatility has been closing up and it has formed a bullish triangle pattern, the stock has been making higher lows for a while, it still has room to go in order to reach the February highs. Towards the end of the session our contract was at 0%, we were not losing nor winning.

FB July 17 2020 $260 CALL

For the first time we bought a Facebook Inc. contract today, after we saw a stock tip of a clear bullish channel pattern and that it was at the entrance point we did not give it much thought. Ever since March, FB stock has been rallying with a lot of strength, a definite top performer from the last 3 months.

We discussed this position yesterday since it was the first time we were buying this underlying and we all agreed that it was an excellent entrance point, without paying much attention to the indicators, which haven’t been trustworthy lately, we bought the contract early in the morning. We bought close to expiration because premiums for this stock are expensive and since we were testing we did not want to put much at stake, and we were just recovering from a large loss with the IWM contract.

The stock tip was definitely accurate, FB in fact did continue to follow the price channel and it bounced on the support, as seen above we ended the session with $37 on unrealized profit and never lost on the trade.

On the other positions we were holding except the Ford LEAP we were seeing attractive appreciations; LEAPS are really long term so we have ambitious goals for these, with the AMD and IWM CALLS we still see room for the underlyings to keep climbing, we do not want to cut profits short.

The Ford LEAP is quite an exception, the stock has been less volatile and since we bought 10 contracts the transaction costs are dipping our Unrealized P&L.

Since we have a lot of breathing room we are not stressed, Ford still has a long way to come back to where it was trading before.

Takeaways:

After some investigation and a test we found out something interesting regarding the PDT rule: the transactions are not limited to 3 in total, they are limited to 3 transactions only if there is a day trade involved (buying a selling the same security in one day), if we do not do this then we are able to buy and sell as many different securities as we please, at least to our understanding, we will continue to test this, it would be a huge relief if it really were like this.

Once again:

• The most important part of placing good trades is determining good entrance points and being able to make this call, it is hard but this will always make trades more profitable. A good entrance point can lead to a trade that never loses money.
• It is important to take the decision cutting losses quick and cold blooded, it is better to lose a portion of the money than the whole position and the cost of opportunity of keeping a losing position rarely pays out, there are more chances of making the money back elsewhere and actively trading than just sitting on a single trade.
• When placing a short trade timing is crucial and of essence, holding onto a short position for too long on the hope that it will do what you think is a huge mistake, the market does what it does and nothing more.