Cutting losses on SPY Option Contract — May 7 Trade Log

The SPY started off leaving a gap upwards; after closing yesterday’s aftermarket session at around $284, the premarket today began trading at $286 but other than this big jump at the start of the day there was not much action. Once more, the stock reached and tested a resistance at $290, this is the third day in a row that the price reached these levels, it has become an important resistance, if it is able to breakout then this would mean that it can keep the trend on to the levels of $295 and even reach up to $300 or more.

We were still holding the 297 CALL, we were happy to see the stocks pick up; because our contract was really depreciated, we were waiting for an opportunity to sell and hopefully without any losses; the market has been really unpredictable and we had seen the contract really under the water, we had losses of about $400 at a certain point, as we saw the SPY up and reaching the same level for a third day and not being able to surpass it we were uncertain of tomorrows session, also, tomorrow is Friday and usually investors rather than holding positions in times of uncertainty prefer to enter the weekend with cash, we did not want to be once again losing so much money and we had chance to cut our losses to about 50% so we waited for the day’s high and sold our contract, we took great losses but it is part of taking the risk of investing. We sold it at $9.26, a net loss of $258.

Looking back at the trade we made for this contract, the mistakes were easy to spot. We bought at a high point of the market in general, at the time of course we did not know and we thought it could have kept on climbing even though it was making new highs ever since the March lows; if we were to look more into the day we bought it, first of all, we bought early in the morning, usually, premiums for these contracts trade higher in the morning and settle at better prices towards the end of the day, if we look at the contracts chart we would see that we bought at the highest point of the month, the fear of missing out got to us bad, a big rookie mistake. Going back to the underlying, we bought at the highest point of the SPY since the low levels it hit on March; if we were to see the Fibonacci lines, which are important resistance or support levels from the market’s high to its lowest point, we see that around $295 it hits the resistance of 38.2%, in the graph below, we can also see that when the markets first were dropping it rebounded twice on this level before defining its ongoing descending trend. We were buying based on the long term trend which is still ascending but we did not take into consideration essential levels of resistance.

For future trades, and the trades we have made ever after this one, we now know that it is important to be patient and buy at a good time of the day where premiums are not overvalued and for the time being, check important resistances or supports that may halt our trades.