really important to bend but not break. In September and October of 2018 we have
realized some relatively large paper losses on our positions for example
Facebook was trading around 170 to 175 and it fell all the way down to around
156 157 and actually earlier this year I fell further than that
Alibaba just last week was trading at around $162
and now it's trading around a hundred and forty-eight when you have these
really large decreases in the stock prices from these very large companies
Facebook is like $500 billion dollar company Alibaba is around $400
hundred billion dollar company it creates large paper losses in their
account now I still believe in these positions and actually a lot of these
positions I still have strike prices that are below the current market price
so I still have puts on facebook with a strike price of 150 but because the
price of Facebook of the underlying stock has fallen so much it's
still showing me a large loss and I have to wait for more time to come off of
that specific option in order for that option to get back into a profitability
so in order so right now it's showing me a paper loss even though it's still
around five or six dollars above the even though Facebook is trading around
five or six dollars above the strike price but because it's falling so
quickly in such a short amount of time then I'm
showing a paper loss in my account on that specific position but with time as
long as Facebook stabilizes and it doesn't approach the strike price in the
same with Alibaba those positions are
eventually going to show me a profit but the reason why it's so important to Bend
and not break is that if you soul too many contracts then you would be forced
to close out those positions for a loss and I can't tell the future maybe
Facebook is gonna trade down to like $140 or maybe Alibaba's going to trade down to
like $130 I don't know but what I do know is that by bending and not breaking by
managing those positions with 100% certainty those positions will
eventually become profitable to me but if I'm forced to close out the position
because I traded too many contracts if I chose a strike price that's too
aggressive because I wanted to maximize the amount of premium that I received
without taking into account the perceived risk of that potential
position then I would potentially be forced to close out that position
because I would be placed in a margin call from the precipitous drop from
Facebook and Alibaba and I would not even have the opportunity to partake in
the games of those positions even though I might be right when I initially made
that trade when Facebook and Alibaba rebounds so again when you trade too
aggressively when you trade too many contracts you are very likely to get hit
with a margin call when a trade goes outside of the expected return and when
a trade doesn't go your way so when Facebook was trading it around a
$172 and then it fell down to around $160 you could sell the
148 put on Facebook or when Alibaba just last week was trading around 165
you could trade or 162 you could trade that 145 put on Alibaba and have it be
profitable with like 95% probability but guess what Alibaba right now is trading
around 148 so if you sold that 145 put instead of having a like $15 of cushion
, $15 between the current market price and the strike
price selection now you only have three so many people there
even that's safe and choosing and selecting their strike price instead
what they do is Alibaba will trade on 160 they would then treat a 155 put and
realize that because they would want to maximize the amount of credit they
receive now Alibaba is trading at 147 there in a margin call and they don't
even have the opportunity to roll and manage that position they would then
close that position out at a loss only to watch Alibaba trade back up to 160
and like a week or two so even though their original premise was correct they
are not able to partake in the appreciation of the underlying stock
because we all know that stocks they go up too much and then they go down too
much and then they tend to retrace their gains or and they retrace their losses
so things tend to normalize but if you trade too many contracts then you are
not going to be able to partake in the normalization of the price action
because your broker is going to force you to close out that position in the
loss so that's why I'm saying that you should make sure that your safety net is
relatively far away from the current market price for example when an Amazon
traded down to like 1550 I sold a put with a strike price of when Amazon was
trading at around 1850 I traded and sold a put on Amazon with a strike price of
1580 could I have received a lot more credit by selling a strike price at 1700
yeah of course but I also don't want to deal with managing and rolling a
position and I also don't want to deal with the stress of checking my account
all the time so I would much rather go for a high probability of profit sell
the 1580 that way Amazon has to fall an incremental 10% for me to even start
getting worried about that position so let the market beat you bend but don't
break this is David Jaffee with BestStockStrategy.com
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