SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Should You Add to a Losing Trade?


I'm sure most traders are familiar with this situation. You find a good setup, watch it for a while, then enter a trade, and it goes down right after you entered. Should you double down and add to your losing trade, or should you cut the loss and exit? That depends who you ask.

If you ask a momentum trader, the answer usually will be "admit you were wrong, cut the loss and get put". Doubling down on a losing trade is throwing good money after bad.

 

If you ask a value investor, the answer would be "add to a losing position". After all, if he liked the stock at $100, it is probably an even a better deal at $90.

 

However, we don't trade stocks. We trade options. Specifically, we do non-directional trading based on Implied Volatility. So our criteria is completely different.

 

Consider the NFLX calendar spread that we entered few weeks ago. Based on backtesting of previous cycle prices, we concluded that entering at 0.95 per spread would be a good entry point. The trade was based on volatility skew between the front and the back months leading to upcoming earnings.

 

Few days later, the market makers decided to re-price the options, and the spread was down to 0.85-0.90. 

 

One of our members posted the following comment on the forum:

 

"This is what is called a "losing trade". The best thing to do , once you aware that it is no longer the trade you initially put on, is close out the trade. .80 -.85 cents will look wonderful when it is .65/.75. There is just no reason to tie up money on a trade with no potential ."

 

My response was:

"Personally, I'm adding to my position. And I would suggest in any case not to panic. Long time members know exactly what I'm talking about."

 

A member responded:

"Adding to a losing position is a losing strategy. The reason why people get sucked into it, as with any other bad habit, is because, just like anything, it does work on a rare occasion , then you continue to do it, because you remember the handful of times it works, and now you have added a  bad trading habit to your arsenal.

Protecting capital is way more important than possibly losing out on a losing trade turning around.

Just because you once added onto a losing position, and it worked that time, is a poor reason to incorporate it into your trading methods.

The only reason why this trade is different than adding onto other losing trades, that have the potential to REALLY hurt you, is that there is no way you will ever lose more than .20 cents from this point. But, that is not a valid reason to add onto a losing trade."

 

Here is the thing: those trades are different from buying a stock. A stock can go to zero, so adding to a losing position can be very risky. But taking advantage of temporary mispricing is NOT a losing strategy. In fact, we did it many times with great success.

 

We closed the trade for an average price of 1.20, 26.3% gain. Not bad for a "trade with no potential".

 

Related Articles

 

 

Want to follow us and see how we trade calendar spreads and other strategies?

 

Start Your Free Trial

 

 

 

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Pre-earnings Momentum Trade in Netflix

    Netflix has earnings due out Monday, October 16th, after the market closes. Seven calendar days before then would be 10-9-2017. Coming off of a nice win in THO, now it's time to look at the company's remarkable history of momentum into earnings events and how it compares to FAANG more broadly. 

    By Ophir Gottlieb,

    • 1 comment
    • 530 views
  • Microsoft Pre-earnings Momentum Trade

    Microsoft has earnings due out on October 26th, 2017, after the market close, according to Wall Street Horizon. 7-days before then would be October 19th, 2017. Microsoft is the forgotten mega tech -- the third largest company in the world behind Apple and Alphabet, but it doesn't fall into any fun Acronyms, like FANG, or FAANG. 

    By Ophir Gottlieb,

    • 14 comments
    • 778 views
  • Options Greeks Explained

    Options Greeks measure the different factors that affect the price of an option contract. Unfortunately, many traders do not know how to read the Greeks when trading. The following infographic provided a brief explanation of the most important Greeks: theta, delta, gamma vega and rho.

    By Kim,

    • 0 comments
    • 315 views
  • Option Trade After Earnings in AutoZone

    AutoZone Inc (NYSE:AZO) has earnings due out tomorrow, 9-19-2017 before the market opens and we can look at a slightly advanced option trade that starts two calendar days after AZO earnings (9-21-2017) and lasts for the 19 calendar days to follow, that has been a winner for the last 3 years. 

    By Ophir Gottlieb,

    • 0 comments
    • 407 views
  • Why Winning Ratio Means Nothing

    A lot of options traders consider 90% probability strategies a Holy Grail of trading. After all, if you can win 90% of the time, you should be able to grow your account very quickly, right? Well, not only this is not true, but in fact, winning ratio alone tells you NOTHING about your chances to be profitable. 

    By Kim,

    • 0 comments
    • 1,951 views
  • Post Earnings Option Trade in Facebook

    For Facebook Inc, irrespective of whether the earnings move was up or down, if we waited one-day, and then sold an one-week at out of the money iron condor (using weekly options), the results were quite strong. This trade opens two calendar after earnings to try to let the stock find equilibrium after the earnings announcement. 

    By Ophir Gottlieb,

    • 0 comments
    • 333 views
  • The Incredible Option Trade in VXX

    The iPath S&P 500 VIX Short Term Futures TM ETN (NYSEARCA:VXX) is referred to as "the VXX.". The obligation of the VXX is to match the performance of the S&P 500 VIX Short-Term Futures Index Total Return and that is a strategy index which maintains positions in the front two-month Volatility Index (VIX) futures contracts. 

    By Ophir Gottlieb,

    • 0 comments
    • 765 views
  • The Art of Trading Decisions

    One of my basic tenets in teaching people how to trade options is that rules and guidelines should not be written in stone and that there are valid reasons for accepting or rejecting some of them. When I offer a rationale or explanation or suggest course of action, it is because I have found that this specific suggestion has worked best for me.

    By MarkWolfinger,

    • 0 comments
    • 351 views
  • Trade Iron Condors Like Never Before

    Iron Condors have gained a lot of popularity among professional money managers and retail investors. It is a market neutral strategy that allows you to profit when the underlying price moves sideways. Iron Condors usually have a limited risk and a high probability of success.

    By Kim,

    • 2 comments
    • 6,609 views
  • Early Exercise: Call Options

    How would a trader like you decide to do early exercise? Say you bought calls when they were trading in the 1.0 -> 2.5 range, now underlying has risen so that calls trade bid-ask at 4.0 / 4.8 and there is strong possibility of it going higher. Also assume in another case that they trade in the 6.0 to 7.0 range.

    By MarkWolfinger,

    • 0 comments
    • 1,854 views

  Report Article

We want to hear from you!


There are no comments to display.



Your content will need to be approved by a moderator

Guest
You are commenting as a guest. If you have an account, please sign in.
Add a comment...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoticons maximum are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...