Managing losing trades, what to
do when a trade goes against you.
Now, are you worried about losing
trades? You see, losses
are part of our business as traders
and every trader needs to
learn how to manage losing trades.
Now, right now, I am
in a losing position.
I'm actually in a few losing
positions, but one of them is really
giving me a headache. So in this
video, I will show you how
I manage the trade.
So let's get started.
During these crazy markets in March
and April, I have very successfully
sold put options, as you might
know. So that's how I made
43% of my account in just 5
weeks. Now, when selling put
options, it's not a matter
of if you will have
a losing trade, it's about
when it is going to happen.
You see, I had 16
winning trades in a row and not
a single losing trade.
But right now, one of my trades
is in trouble. So right now,
I want to show you what I did,
the trade that I entered and how
exactly I'm planning to manage
this losing trade.
So you see, the trade in question
is a trade on Hertz and let me show
you exactly what it looks like.
Here's Hertz, and
a few days ago, right
on this day, shortly before
Hertz crashed down, I
sold the 3.50 put for $0.35
and I sold 25
of them. Because you see for each
put option the broker deposited $35
into my account, and since I'm
trading 25 options, that's a total
of
$875. Now, as long as Hertz
stays above this blue line,
which is $3.50 within
the next two weeks, I can keep
these $875.
However, if Hertz will be below
3.50 on May 15th when the
option expires, I have to buy
100 shares of Hertz
at $3.50.
And see, since I'm trading 25
options, that would be
2,500 shares.
And as you can see, right now as I'm
recording it, Hertz is trading
right at my strike price at $3.50,
it's trading right now here, $3.51.
Of course that's not good.
However, I will not
get assigned yet.
Why? Because the expiration of the
option that I traded is May
15th. So as you can see today
is May 1st so there's still
enough time.
However, you'll notice that the
position is deep in the
red. Let me bring up my trading
account here.
There you see it.
Oh, my gosh.
Right now, this position is down
$1,875. I sold this for
$0.35 and I traded
25, that's what you see here,
25 options.
And right now, this option is
trading at
$1.10, $1.10 over
$1.15.
So this means that
right now I'm looking at a loss
of $75 per option.
And since I sold
25 options, that's a loss of $1,875
as you can see right
here. Now, first of all, to me
that's not a big deal.
After all, as you can see this is a
$35,000 account. So being down
$1,800, $1,875
is a rather small amount for
this account size.
But let's talk about this
situation.
You see, here's what happened with
Hertz because Hertz just
plummeted shortly after I entered
this trade.
This is right here when Hertz
went all the way down.
So what happened?
Hertz missed a payment and
they have until Monday,
May the 4th, which is three days
from now, to negotiate with
the creditors and come to an
agreement. Now, if they cannot come
to an agreement, they already said
that they will probably file for
bankruptcy next week.
Now, from my perspective,
the creditors would be stupid
to force them into bankruptcy
because Hertz collateral
is cars.
And right now, the used car
market is in the trash can.
I mean, we have a pandemic going
on, right? Nobody is buying new
cars. So there's no demand
for new cars and dealerships
are selling their inventory to
reduce inventory costs.
So if the creditors take all
of Hertz cars and do
a "fire sale," they probably
only get pennies on the dollar.
But hey, it's their decision,
not mine. So here are the two
possible scenarios that can happen
on Monday. Scenario number one,
Hertz and the creditors come to an
agreement, and the stock price poof,
jumps up. Now, in this case, we can
try to get out and break even,
or with a small loss or hey,
maybe even with a profit.
Now scenario two, there is no
agreement and Hertz files
for bankruptcy next week.
Now, obviously, this could
send the stock lower, even though
I believe the possibility
of bankruptcy is already factored
into the price right now.
This is why it is trading at $3.50.
However, these are the two
scenarios.
And these two scenarios leave us
with three options.
Option number one, we can get out of
the trade right now and I
would lose $75 per option traded.
Now, for some traders
who tend to panic, and obsessing
about a trade this might
be a good choice for them because
then they can sleep again at night
and don't have to worry about a
trade.
But hey, that's not me, I'm not
the panicky kind of trader.
Now, option number two
I can wait until we get
the news on Monday or Tuesday about
a possible settlement or what is
happening here with the creditor.
Now, I'll break even on this trade
is a stock price of
$3.15, and here's why.
So the strike price is
$3.50, and when we sold
the option, we received
a premium of
$0.35. This is what we got
at this point.
So this means we already received
this, it's already in our account.
And if we subtract the
$0.35 from the $3.50
we arrive at $3.15.
So as long as the
price stays above $3.15
we should be good.
You see we have a buffer of
$0.35. So, therefore,
our real loss will
be the difference between $3.15
and whatever price Hertz is trading
on May 15.
So example, let's say on
May 15, Hertz is trading
at $2.50.
So in this case, we would lose, what
is the difference here, between
$3.15 and $2.50,
so we would lose
$0.65 per option.
Now options come in hundred packs,
as you know, and so
this means that we are losing
$65 per option.
But you see, that is less
than selling the option today
for a
$75 loss.
This would be if we sell it today.
So again, as long as it stays
above $2.50 until
May 15th,
we are good.
Now, before we move on,
is this making sense thus far?
Because if it is, do me a favor.
Click on like so that I know that
I'm not going too fast or too slow.
So if you're enjoying this video
thus far click on like right
now. So here are
the main differences between selling
today and waiting
until next week.
Number one, when selling today,
I would realize a loss of
$75 per option, right?
I mean, we just talked about it.
But it could be that I'm getting out
at the worst price.
This is why it is so important
that I'm willing to buy the stock at
the strike price that I
sell the option for and in my case,
that is $3.50.
Now, number two,
when waiting until next week,
there is a possibility
that Hertz snaps back
and I can get out at a smaller loss
and break even or
maybe even with a profit.
So you see only if the stock is
lower than $2.50 on
May 15th, I would lose more
than the $75, which is the loss
that would happen when I liquidated
today.
And here's why, I mean, we just
talked about it, right? We know that
our break-even point is $3.15.
And if you would sell the option
today, we lose
$75 per option.
So we need to subtract this from
the $3.15, and this
means we would lose the same
amount if we sold today
or the stock is trading
at $2.45
on May 15th in two weeks from now.
Even though there is a possibility
that the stock might be lower
than $2.50 on May 15th
I believe that there's also a
possibility that the stock jumps
up, even if it is only for
one day.
Could be based on rumors, could be
based on some takeover news
or whatever. However, if it jumps
up just for one day,
we can get out of the option at a
better price than it is right now.
So the key question is which
of these two scenarios is
more likely?
Scenario number one, is it more
likely that the stock is now
dropping to $2.40
or $2.50 and never
trade above $2.50
again until May 15th?
Or is it more likely,
scenario number two, that the stock
is jumping up based on some
rumors regarding the rescue
or takeover, and it just jumps out
very quickly, as you can see, or
maybe to the $4 level
or maybe the $5 level just
up to here.
Okay? Because then we could get out
at break-even or
maybe even at a profit.
For me personally, option
two that we have this quick
jump is more likely.
Now, as you can see, when selling
options, it is absolutely
important to have a plan
and most importantly, to stay
calm. Because if you panic, you
could close the position at the
worst possible time and sit
on a large loss.
Now if you want, I can keep you
updated on the outcome on this
trade, all you need to do is
subscribe to this channel and
hit the little bell because this way
YouTube sends you a notification
whenever I go live or release a new
video.
So this way I can keep you posted on
the update of the trade.
Hey and if you enjoyed this video,
then you might also enjoy some of
the other videos that I've made and
simply click on one of the videos
that appear on the screen right now
and I'll see you in the next video.
Talk soon.