how to deal with losing trades. David Jaffee with beststockstrategy.com and
in this video we're going to discuss how you can deal with in the money and losing trades.
So around three times a year we end up having a position that becomes pretty deep in the money.
People think that they're gonna win a hundred percent of their trades
but it's not possible to win a hundred percent you can win
up to 98 percent of your trades and still have an occasional trade go deep in the money. The problem
with selling options is that you have to make sure that during periods when the actual volatility is
more than the expected volatility that you're able to minimize your losses, manage the positions,
not incur too much anxiety and stress and make sure that you don't run out of buying power.
And if you're unable to deal with the occasional trade that becomes in the money then it's highly
likely that you should not be trading at all think about it if you're able to win 98% of your trades
but you're unable to deal with the two percent of the trades that end up causing you losses
then you should not be trading at all i would highly recommend that you go find something else
to do because if you're unable to be disciplined and not get stressed out and not be able to manage
your positions and if you're trading too large and getting too greedy then there really isn't
that much hope for you unless you learn how to be disciplined and patient when entering trades
when the market pulls back there's always a large volatility expansion event and that volatility
component when selling options usually ends up being highly detrimental to the option seller
you can have a situation where an option that you sold last week when the VIX was trading at 15 is
not even being challenged but if right now the VIX has doubled then that position can end up showing
you a significant loss even if the current market price of the stock is not even close to the strike
price that volatility component during a large downtrend is actually going to be your biggest
enemy it's not necessarily going to be the in the money positions but it's going to be the in the
money positions in combination with the volatility component that is going to end up causing you a
significant amount of stress and paper losses that's one of the primary reasons why you
always have to make sure that you leave an excess amount of buying power so that you don't have to
close out positions at the most inopportune time one way that you can inoculate yourself
against dealing with stress of positions that are challenged is to make sure that you always trade
small by trading small it removes some of the emotion that is inherent in seeing a position
turn red and seeing a position go against you additionally when you're trading small you
have much more flexibility to manage and roll that position i can tell you from experience
that when i have an in the money position i do not stress out i don't get very anxious because i've
had numerous in the money positions previously and the best way that you can inoculate yourself
against the anxiety and the stress of having in the money positions is by real world experience
i would also recommend in general that you trade strikes which are further out of the
money and that you trade underlyings which are strong brands these include companies like amazon
or apple or even stocks which are relatively resistant against a recession like dollar general
you can even trade options on indices or futures like spy or spx all right so what are some things
that you can do in order to manage or trade around a challenged position the first thing that you can
do is sell call options the second thing that you can do is that you can wait up until the last 10
or 15 minutes of the trading day so that way there's virtually no extrinsic premium left in
that option and then you can roll out the position you see when volatility is high it's relatively
easy to roll positions because there's so much extrinsic premium baked into the option price
so if you wait until the last 10 to 15 minutes to roll that position forward then you're able
to realize a much more advantageous strike price when you roll that position forward
than you would if you rolled it too early because effectively the extrinsic premium of the position
that you're closing out is going to be zero but the extrinsic premium that the position
that you're rolling to in the future is going to be incredibly high because of the high volatility
as a result you can use that extrinsic premium that you're rolling out to allocate it towards
the strike price and significantly reduce the strike price of the option that you're
closing out and rolling to for example i had a 185 strike on Paypal that was expiring on December 3rd
on December 3rd at around 350 pm eastern or 10 minutes prior to the market closing I then closed
out the December 3rd 185 strike and I rolled it out to December 10th and I sold the 165 strike
i also sold a call option i think the call strike was about two hundred and thirty dollars
so i financed this entire transaction by having there be virtually zero extrinsic premium on
the 185 that i was closing out then i rolled it forward by one week reduced the strike price by
twenty dollars all the way down to 165 and i sold the call option and i picked up a credit
and the following Monday i closed out the 165 strike put option for about 30 cents this is a
great example of how being patient and discipline allows you to profit during periods of large
volatility expansion events because as the option that you currently hold gets closer to expiration
the extrinsic premium will get closer and closer to zero you can then roll that position forward in
time and then you can then allocate the extrinsic premium towards reducing the strike price of the
option this is how i was able to reduce the strike price of Paypal by twenty dollars
just by rolling it out by one week if i had tried to roll the 185 put option on Paypal just one day
prior on Thursday i probably would have only been able to reduce the strike price from 185 to 175
but instead by waiting until 10 to 15 minutes prior to the expiration of the option so that
there was virtually zero extrinsic premium left on that option i was able to reduce the strike price
all the way down to 165 and then i closed it out the following Monday for about 30 cents. David
Jaffee with beststockstrategy.com if you want to see how i trade go to beststockstrategy.com
memberships and enroll and follow our trades it's only $19 for seven days if you have any
questions leave a comment below please like this video and i appreciate your attention