Good Trade Gone Bad
Monday, March 3, 2008 at 11:03AM Last weeks trade anatomy got some pretty good feedback, and the most popular suggestion was to take a recent loss and show you how I closed out the trade.
Whatever.
I am going to show you a chart of GILD, but remember...the strategy and principles discussed are how I treat EVERY trade I take. This is a redundancy that I am forced to answer everyday, and hope it answers the questions for those that haven't been able to put this together quite yet.
GILD was a price pattern I highlighted a few weeks back. Here is a copy of the chart...
The triangle is outlined in red dotted lines. The pattern measured $5 points wide ($42-$47). My target was $39 and based on the breakdown of the triangle, I planned on closing out the trade if it closed back above $45 (solid black line - or - signal line).
On Feb 21st, about an hour before the close, it was apparent that GILD had broken support and would sustain this price move.
I bought Mar 42.50 puts.
Why? I expected the stock to move to $39. If that were to happen, the puts would have $3.50 of intrinsic value.
I paid $0.90 for them. Good risk/reward, huh?
It is also noteworthy that I positioned myself to lose the entire premium...but would surely get some back when/if my exit was triggered. Now that's the way to manage a potential loss!
A few days later, the stock sky-rocketed right up to my "signal line." Intra-day it had surpassed this value, but as I patiently waited towards the close, prices fell from their highs and rested right at my line. I smiled and knew I played this trade perfectly. I even giggled thinking about anyone who had sold at the highs when this stock was getting ready to smash back down toward its lows.
I was wrong.
The next day prices continued their surge of strength and I knew I would be taking a loss. Because I am a disciplined trader, I waited to close the position until the end of the trading day, after prices had committed to their early morning strength. At that point I sold my March 42.50's for .15 cents. I didn't lose the entire premium. I rock.
Moral of the story...have a plan, trade the plan, and always plan for a loss.
Reader Comments (146)
I feel great when I salvage a few cents from a trade gone bad too.
That aside, you do rock.
Keep it up.
Berkshire
Thanks Jeff,
I know you get tired of writing it,but I never get tired of reading and relearning the lesson. Mike V
Thanks Jeff!
I'm assuming you closed out this position with less than a 1% loss on your total account?
Jeff,
Thanks for the example. I have too many of these trades and less of the CNQ type.
Jeff,
I think that was a great example. It shows people how to let the strength/weakness play out before committing.
Very nice illustration.
Berkshire
Great example....when i get underwater, I freak and jump out, and maximize my loss.
COIN has all the momo at the moment. Just broke out of little flag pattern on a 10 day 10 min looksee.
DrDirt,
With all of your speedo protection, you would think you were very nimble "underwater."
Sorry, that one just slipped out.
Berkshire
COIN...
Nothing like New Jersey trash people to create a company that is up 700% in a matter of months.
Berkshire
Berk
I'm getting nimble, a lesson learned. This market has me handcuffed, even my paper trades have me dizzy, like DE. long short, shooooo...make up your minds
little help please,
I have a march PFG put which has a nice profit on. However, it looks like a hammer is/has formed. Sell now?
Hey Berk, something positive to say on at least one of posts please. Your givin me a complex here.
Actually, Gecko...
Congrats on that one...The business ethics scared me out of a HUGE winner. (As a trader I shouldn't really care, for some reason I did on this one...)
Glad to hear you have taken advantage of it.
That better?
Berkshire
Speaking of coins, my silver coin collection albeit rather tiny, is appreciating in value faster than I expected.
Nate,
Good point.
I melted all my wifes gold jewelry and sold it back to the jewelers for more than I paid for it years ago.
Svoloch,
When did you enter, what is your exit? Is it at your stop?
Do you have a plan to get out?
Answer me these and I can try to help.
Berkshire
Yes Berk thanks, I am now emotionally able to face my portfolio :)
Svoloch,
We had this argument on MTL a few days ago.
Unless an unexpected hammer was your exit strategy, stay with your orignial exit plan.
Own it!
ha...Jeff IS human... ;)
Berkshire,
I got in around 60, and planned to exit at 52. But today it looks like it might be on it's way back up. Thanks
Thanks Jeff.
Jeff,
On your post: Do you consistently use the apex of the symmetrical triangle as your line in the sand (signal line) rather than a close back inside the point at which the symmetrical triangle broke out?
VA beach,
Consistently? No.
Often? Yes.
It depends how much of the triangle has developed, and the distance prices would travel, and the total loss it would create.
I learned a valuable lesson from last week. I became caught up in being bullish and did not keep a balance of puts and calls in my portfolio. Thus, on Friday I almost fell over when I saw my P/L Day column. So in true amateur fashion, I took some profits (tiny) in my agriculture, coal, steel, and gold stocks. Instead of letting my stops do their work. But I feel that the mistake on Friday by panicking out was the minor mistake. The major mistake was made on Tues, Wed, and Thurs of last week when I did not add enough bearish plays to properly balance my portfolio. If I did add more puts earlier in the week my P/L Day column would have looked pretty good. I could have taken some bearish profits off the table on Friday afternoon (still keeping a balance however) and would have kept my longs on with stops in place. Instead, I am kicking myself today on the sidelines watching the stocks I used to own go up.
The main point of my story is when I first started reading Jeff's blog about being delta neutral I didn't see it being all that important. Now I understand why Jeff constantly focuses on this point. So it was a cheap lesson as far as I am concerned. Hopefully, this comment/story could save a fellow reader from making the same mistake I did. Jeff I wanted to thank you for constantly guiding us option addicts and after a tough friday I feel I am that much closer to the promised land.
Scooter,
You did not melt her jewellery. You wouldn't dare after that Tiffany's purchase......nice try :)
Somehow I;m thinkin Mrs Jeff has all her jewelry still.
Svoloch,
What was your timeframe??
Did you make more or less than you expected/were looking for?
I could see this easily retracing up towards the 57-58 range. However, it is a financial, and they will have a hard road in front of them.
Berkshire
Berskshire,
Are you from Rockaway, NY by any chance?
Jeff,
You only melted the gold to go buy Amber some platinum Tiffany settings after the "go make me some dinner" comment. Fess up...
Jodi,
The Tiffany collection is locked away in a place that even I don't have access to. But I did ask if I could melt the "old gold" stuff...and you are right, the answer is no.
Usually I bluff fairly well.
Too bad ITC doesn't have more open interest...it is at a great e/e!
Axman,
No, but if I visit NY I think it deserves at least a visit, no?
Berkshire
Berk,
Yeah, its a pretty beach town. I live 20 minutes from it. I thought we could have setup a NY Chapter of OA.
Damn, had I gone long on Jeff's jewelry bluff, I'd have lunch money
Berkshire,
good question. I have a Mar put, so exit with about a week before expiration was my plan. Made about 84% so far. Although, my biggest problem has always been to cut my winners short (and let losses run)
Would have been great Ax,
I'd love to get a group of OA's (particularly us youngens) for a meeting of so. Alas, I think we might be too widespread.
Berkshire
Berk,
I plan to retire in Kohler Wisconsin.
So yes, it deserves a visit.
Question:
What is considered "young" now days?
I am still wondering if I fit that description any longer.
Svoloch,
Based on the information you have just given me, it appears like you have planned on holding on. Hopefully you didn't expect the stock to gap into your target range the next day. So, you should be prepared for some wiggles. This stock is in a weak group and is down-trending with the market, so I would likely hold on. Possibly even adding to around the 57-58 range.
IMO.
Don't sell yourself short.
Berkshire
Svoloch,
Great job btw. 80% in a few days is a good trade. Be proud.
Berkshire
Jeff,
Your taste in rap music will always keep you young. Keep it coming.
Your under 30 right.
That's the cutoff in my book.
Sorry any geezers I offended. Particularly any geezers under 40.
Berkshire
And you know I will break bread...
Jeff,
I'll look for you if I am ever in need of some cheddar.
Berkshire
Thanks Berkshire
Berk,
At 32 I think this is the first time I have ever been called a geezer! Your time is coming, it's gets here faster than you think.
I appreciate this example. Thanks Jeff
Jeff,
You "positioned myself to lose the entire premium". any reason why you did that here. Do you have rules for when you do that?
Berk,
At a young 35, I'm offended!
Road,
It is already creeping up on me.
"Your time is gonna come"
Perhaps some truth in the tune.
Berkshire