The market continues to take option traders on a volatile ride, and option prices have also been all over the place as well. Let’s talk about something I stress with my students all the time. In fact, I just had a conversation about it last week. The student asked, “Should I make an adjustment to my position even though my thought process has changed?” And I told him that an adjustment is not always the answer.
It’s a New Trade
I like to tell traders to think of the adjustment as a brand-new trade because that’s what it is. You are most likely closing out a losing position and entering another one. If the reason you took the initial trade is not there anymore, why would you enter a similar position? A new trade or an adjustment makes sense to me only if the new option position reflects the current outlook.
The ‘Revenge’ Scenario
When you look at the possible psychological aspect of closing out a losing position, there is a tendency to think of it as a “revenge” scenario. Who likes to lose money or have a losing position? For many the thinking is, “I am going to show that stock who is boss!” Clearly, not everyone will feel that way, but a majority do based on my experience talking with traders over the years.
Avoiding the Drama
To avoid that drama, I tell traders to remember that there are plenty of other fish in the sea, meaning there are other trade ideas just waiting to be found. I also like to say that while you might care how you try to make up the loss on that last position, your P&L does not. For example, just because Tesla Inc. (TSLA) took your money does not mean you have to trade the same underlying to try to profit on the next trade you do.
Final Thoughts
If you are struggling with this, there is one easy thing to remember: After a loss or if your stop loss is triggered, do not trade the same underlying. This will give you a much better look at your next opportunity. and the revenge factor for that underlying will not be there. I cannot tell you how much it has helped me and others. Emotions have ruined more than a few traders I know.
John Kmiecik
Senior Options Instructor
Market Taker Mentoring
