"Actually, to keep it simple, long put+short call+long stock=zero, i.e. it's a flat position." If you think the stock is going to tank below $50 and you need the put then holding is a waste of time/money with no gain. But if the stock is range bound and you think it will bounce off it's previous support and go up, ( as COP has been doing for months) you can buy the call back at a cheaper price= winning trade on the call and sell the stock when it gets back to $78. Here's how I used a similar strategy. I used to sell IV . So ... shorted 10 TASR calls 6 mos out for $300 each with stock at $27, strike price of 30. Trade moved against me. Stock hits 30, calls are at $450. I could have taken the $1500 loss. Instead I bought the stock at $30, sat on it for 5 mos and kept the $3000 premium when the stock was called away at my purchase price of $30. Look, the purpose of the post wasn't to convince anyone to trade this way, just to see how others view taking losses versus tieing up capital when there are ways to trade out of the loss using options, single stock futures etc..
See, that's where I completely disagree. There's no way to trade out of a losing position or rather the trades you make afterwards have to work in order for you to "trade out of a loser". Each and every trade or adjustment, as some like to call it, to a losing position has an awful risk/reward ratio (a ratio that wouldn't even be considered if it were a new trade). So, what's the point of taking on unnecessary risk and spending time and effort on trades that do not meet your trading criteria, and will likely result in a negative edge over the long run!? Just so your ego can get a boost from having a "very high success rate", which is really artificial in this case!? Anyway, I'm not trying to convince you or anyone how to trade, you asked for opinions, so I gave you mine.
Well MTE, I find it interesting that two people of reasonable intelligence with the same objective, to preserve trading capital and make $, look at the same situation so differently. But then again it might be like comparing the strategies of a hedge fund manager with a mutual fund manager. So in the case I mentioned with TASR, would you have just taken the $1500 loss?
There are countless ways to trade profitably in the markets so just because we have different views doesn't mean that both of us cannot be successful. When you bought the stock at 30 you entered a trade with a negative $1,500 edge. Is that a good trade? With that said, I don't think I can really comment on that trade cause my approach is to always consider whether I would've opened such a trade as a new trade. So in this case, I would've asked myself, do I want such a covered call position now or not...probably not. Also, the stock cooperated with your adjustment. What would've been your course of action if the stock tanked to 20, in which case you would've had a loss of $7K? What about 15, 10?
Successful traders get used to taking small losses. "If you can't take a small loss, sooner or later you will take the mother of all losses." - Ed Seykota.
Hi chrismontez, Even though you've done very well so far, I think you've been lucky. Using gut feeling, having no system, and averaging down are recipes for disaster. I know because I was there not long ago. Now I trade a fully mechanical system for stocks and I maintain a blog. I suggest you have a read there is some good stuff on there about expectancy, position sizing, and risk management. These topics apply to trading any sort of instrument. http://thetrendfollower.blogspot.com/ All the best, Nizar
"Also, the stock cooperated with your adjustment. What would've been your course of action if the stock tanked to 20, in which case you would've had a loss of $7K? What about 15, 10?" Well I think here would be a good place to practice the small loss strategy. I bought the stock to cover the short calls because the stock was going up and I would have bought the stock or calls anyway. If after having bought the stock it reveres, I would take a small loss on it and I would still be up part of the call premium. Or depending on the numbers, I might use the $ from the call premium to buy puts and set up a synthetic short that at least kept me even. But that would result in tieing up $30,000 in capital for 5 mos to avoid eating a $1500 loss. As I said earlier, just looking at how successful traders view money mgmt. issues vs loss taking. My personal experience with protective stops and trailing stops hasn't been good. The few times I've set a 10% protective or trailing stop and taken the position off my screen, I've left alot of $ on the table. Bought GM at 52 week low around $20, got stopped out, removed the position. Gm at $38 now. LFC 10% trailing stop. Stopped out at $52, LFC at $200+ (pre split price). Most recently LULU. Stopped out twice at 10% losses. LULU now at 100% above my initial purchase price. Anyway, I appreciate getting intelligent feedback on the post.