Traders Fail Because They Stop Trading

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Options traders: In tonight's video, we're going to go over all of the trades, the ton of trades that we had today. It was a very, very busy day in trading. We haven't had a trading day like this in a while where we had so many different opening and closing and adjusting trades. It was just what the day brought us, and so that's what we had to do. This is again, for May 6th, which is Wednesday. 

Just to start off this video ... I want everyone to honestly listen to me on this point here, because I get so many emails from people, different things from different people. What I'm finding more particularly in this earning season is that we've obviously had trades that haven't gone our way with Netflix and Amazon and et cetera, Microsoft or whatever.

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It doesn't really matter. Sometimes you're going to have that. You're going to have a string of trades that just don't go your way, or the stock makes a huge move. What I am continuously seeing from people, that in my eyes I believe is one of the biggest reasons why people fail in this business, is that you give up on yourself and you stop making trades.

The best thing that you can do in this business is to continue to make another trade right after you made a losing trade. Even if you made a losing trade that was a big loser or hurt, I get it. The worst thing that you can do is stop because the laws of probability only play out over many, many, many, many trades. That doesn't mean in a high probability system that you are going to have 100% winners. That's just not going to happen, but unfortunately, some people do believe that that is the reality that should be out there.

It's not. You're not going to have 100% winners. It means that you are going to lose on 30 or 40% of your trades, whatever probability level you're trading at. Those losers are going to be bigger than the winners, but it's the long-term averages and probabilities that work out. If you don't make enough trades, you're never going to reach that target.

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Hear me out on this hard on this earning season, because it's a great time to dig deep within yourself and figure out if you want to be doing this if you have what it takes to continue in this business. What that means is coming back the next time around, the next trade, and continuing to make trades. Continuing to make earnings trades or regular trades, whatever it is, but to bounce back and make more trades. See, in my eyes, I don't ever care necessarily if I have a losing trade, because I know it's just part of the game.

The longer and longer and longer I trade, the more consistent I become, the more and more profits that I will eventually see. It's just a long-term numbers game. I'm not going to get myself worked up about a short-term loss here or a short-term gain there. Whatever it is, I'm going to stick to my plan for trading and make lots of these trades, because I know that the numbers only work out over a long period.

Let's go through this kind of case in point today, because we had two good earnings trades that we closed out of early in the morning. One in EA, which was our strangle that we bought back, and then the other one, excuse me, was in Groupon, which was our iron condor that we bought back. Both of these, profitable trades. I had people that said, "Hey Kirk, you know, I didn't get into any of those trades. I was scared."

Well, now these profitable trades are starting to eat away at some of the losing trades that we had last week, like Netflix and Amazon, et cetera. If you never made these trades, if you were scared to get into them because you thought you might lose money, you never saw an opportunity to make some money back. Okay? That's just the name of the game, are you can't be scared. You got to believe in yourself and believe in the system enough to keep getting back in even if you've been knocked down.

I had two good trades there, EA and Groupon. I'm not going to cover those too much. Implied volatility dropped. The stocks opened within the expected range. Not much else we needed to say there. They were very good trades. Also bought back our May iron condor position, S-P-Y. That was a good trade as well, took a $39 profit. Again, nothing to say there. The stock moved sideways, implied volatility dropped, a nice little move.

The trade that I do want to cover a little bit in closing is the Microsoft trade. This was an earnings trade that went completely against us. Now, this is a great case study as to why you have to roll these trades to the next month and be a little bit strategic about how you exit. Right? The whole idea of rolling the trade to the next month is so that we get more time for Microsoft to come back into our range, or any stock to come back into our range. If we're paid to roll to the next month, then we only reduce our risk.

Here's the deal. We closed out just this call side that we had left in Microsoft for a 78 cent debit. That was the goal to see Microsoft move down, which it did. Closed out this side for a 78 cent debit on all of the trades that we, or all of the adjustments that we made, including the original earnings trade, we did take a 126 loss. Now, this isn't the most important thing. Here is why this is critical. Here is the actual opening alert that we had for Microsoft.

Now, notice we opened this original earnings trade for a 24 cent credit, and we did it with a $1 wide spread. If you did absolutely nothing at all, which is sometimes what people do ... Hopefully, you guys can see my calculator on the screen here. Then your risk per iron condor would have been $1 wide strikes minus the 24 cent credit, or 76 cents per iron condor of risk.

Now, we did three of these, so that means that we had a total risk of $228, meaning that if we did absolutely nothing at all, which is what some people opted to do, not learn the strategies that we're trying to teach, not try to do anything about it, kind of fold their hands and say, "Hey, options trading doesn't work. You know, the probabilities don't work." They did nothing about it.

You lost $228 on Microsoft after earnings because the stock moved well above where it was expected to go. In our case we ended up rolling the trade out to the next month, being a little bit strategic about how we exited and entered the trade, and we ended up getting out of the trade with only $126 loss. You can see here that the $126 loss versus what we should have lost if we did absolutely nothing at all, we were able to take Microsoft and virtually cut our loss by 45%, almost in half of a bad trade.

Now again, you have to be committed to doing this. I say this honestly with everyone with these earnings trades. These are not walk in the park trades. There's going to be trades that test you, and you're going to have to do a little bit of that strategic movement in rolling the trade out to the next month, but if you learn how to do it correctly then you're able to take a trade like this that goes completely against you, that doesn't work in your favor, and at least cut your loss in half.

Okay? That's the goal is to cut our loss by some margin. Half, 10%, 30%, whatever it is. If we can take all the losing trades that we've had and cut the loss in half, we'd be a ton better. Right? That's what you should be thinking about too, are you know you have a losing trade, "Okay, how can I reduce this loss? How can I cut it in half? How can I extend the trading time line?" Microsoft was a good example of that this week. Again, I just wanted to bring that to your attention.

Other trades that we had today, so let's get into some of the earnings trade that we had. The first one that we had is in RIG, which is an oil ETF or an oil sector stock. Not an ETF, I'm sorry. What we decided to do was do the iron butterfly, mainly because of the strikes. They didn't have a lot of depth really far out, and so what we decided to do is sell the 19/21 call spread, so sell the 19 calls, buy the 21 calls, and also sell the 19/17 put spread.

So sell the 19 puts and buy the 17 puts. That gave us a total credit of 97 cents, which did get us outside of the expected move for RIG. Here's the setup in RIG. See the stock slowly starting to rally with oil sector in general. Implied volatility, high but not incredibly high at the 57th percentile, opted for an iron condor-type trade because we wanted to be a little big more conservative. You can see stock closed right at $19.

The expected move was about 99 cents at the end of the day. What we did is just sell those inside strikes at 19 call on either side, and 19 put on either side and then go $2 outside on either end and buy an option for protection. We went to the 21s and the 17s, and this gave us a very balanced trade, so our risk to reward is one to one. We can make about 100 bucks, lose about 100 bucks, but we've got a pretty wide window of opportunity here, about $2 wide, which is the expected move for RIG. Hopefully, the stock opens within that expected move.

GMCR is a very similar on. GMCR though, had really high implied volatility. We opted to go with the strangle in our case because we have the capital to do it. If you didn't have the capital to do it or don't want to do the strangle, then you can obviously turn this into an iron condor. There's video tutorials inside the membership area that shows you how to do that.

We decided to sell the 122 calls and the 95 puts, took in a massive credit of $2, which was fantastic. That moves our break even point out $2 on either end for GMCR. Here's GMCR. You can see implied volatility extremely high, up in the 89th percentile. Stock's been trending down just a little bit, so I think the stock opened down a little bit lower after earnings, which is a little bit of a surprise given that it's been trending lower.

With GMCR, expected move was about $10. We tried to get outside of that move by going a little bit further, and that paid off a little bit because right now the stock is trading after hours about 96-1/2. It moved a little bit beyond that expected $10 moved, and so the fact that we got just outside of that expected move, still took in a pretty good premium, puts us in a pretty good position.

Our strikes and break even points are another $3 or so lower from where the stock is trading right now. You can see stock closed around 108, which was right in here, and is not trading down here around 106, or I'm sorry, 96-1/2, 97 or so. Our break-even points down here at about 93, so it looks like it should be a pretty good trade. We'll see where it opens up tomorrow but should have a nice, healthy profit in Keurig.

The other trade that we got into today, this one was a combo trade. I did say in the original alert that we were going to enter some extra wings on this, and I hadn't sent out the alert until kind of towards the end of the day. That's just when I got filled. That's not because I don't like you guys and don't want to send out the alerts. I just always want to send out the alerts as soon as I get filled. Sometimes that does happen at the end of the day.

If you're uncomfortable getting those trade alerts a little bit late, then please do not enter the trade if you do not understand it. Sometimes they go out earlier, sometimes they go out later. It's just the nature of the business. I cannot control when the market gets filled, especially from my positions. What we did in WFM is we did a regular iron butterfly. We did the 47 1/5, 51 calls, and the 47-1/2, 44 puts, and took in a nice credit of about $2.33.

Now, the reason that we did that is that this stock, even though historically you guys can't see it except for this one big move here, this stock has been known to make big moves. In fact, very extreme moves. What we wanted to do was to make a trade, maybe play possible the fact that the stock might be a little bit range-bound, but then also go out on either end and buy some protection for ourselves.

Here is our original position, again doing that iron butterfly right over the market at 47-1/2. Now, that's what we were playing is maybe the stock has an earnings announcement and kind of trades in the middle of this range. We wanted protection on either end in case of a large move. Not a move just beyond our strikes, but a very, very large move in either direction.

What we opted to do was to buy an extra call and put at 41 and 54. This gives us these extra wings which kind of re-tilt this iron butterfly profit-loss diagram to something like this. This is now what this position looks like. It's unbalanced and looks a little bit uneven. Hopefully, you guys can see it here. Now we have this iron butterfly all the way until we get to the 41 strike, and then it starts going back up because we've got some extra long put options here at 41.

We have two long options for every short option in this particular trade. You can see how that gives us kind of a weird shape. It's not something that we do very often, but we're trying to play big move lower or big move higher. In this case, at least right now after earnings, it kind of has moved right in the middle of this range, which really sucks but it is what it is. Okay? We didn't spend that much money on the buy-in.

The protection is about $16, so it wasn't money that I think was badly spent. It definitely didn't change the perspective of the trade. We couldn't have made money by not doing that. At least at this point we're definitely going to hold this thing all the way through tomorrow and probably Friday, because what happens with Whole Foods in particular is we tend to see the stock maybe open up at some range and then rally over the next couple days. All we need to see is the stock kind of really fall hard, which might be very easy to do after the market opens.

In this case I'm not totally writing this one off yet. I think this trade actually has legs to go the distance and become maybe a profitable trade. Hopefully we'll see what happens when the market opens up tomorrow. That's the trade in Whole Foods. Again, we've spent only about $16 buying this extra protection out of our 233 credit, so we'll factor that all in once we close out the trade in our profit and loss. At least at this point if Whole Foods does make a huge move lower we'll have an opportunity to maybe make a profit.

The last trade that we got into earnings-wise is our BABA trade. Obviously, we wanted to trade BABA around earnings, and we did the 86/88 calls, the 73/71 puts. In this case, we sold the 86 calls, bought the 88s, sold the 73 puts, bought the 71 puts, took in a 55 cent credit. Trying to get on BABA outside of the expected move that the stock might have. Now, the stock doesn't have a lot of history to be able to show us implied volatility, rank or percentile, but we're pretty sure that it's got a very high implied volatility.

It's a fairly new stock and when you go inside the actual trade tab what you'll see is you'll see the implied volatility for the actual options on the weeklies. The weeklies are trading for about 104, 105% implied volatility. The next monthly contracts are about half of that or less. It's a big disparity, which means that there's likely a lot of high implied volatility their kind of juiced up in those front, weekly options.

Again, what we were trying to do with BABA is to get outside of the expected move, which was about $5-1/2 outside of that range on either end, which we definitely did, and gave ourselves some safe distance. They announce earnings tomorrow before the open so we'll have to play this one tomorrow before the open, but it looks like it should be a pretty good trade as far as setup-wise. I like that we did go a little bit further out than the expected move just to try to get some more distance between ourselves and the market.

All right, so the two hedge trades that we had for today, the first was in USO. We rolled up our put option that we had from 18 to 21-1/2. This was nothing more than continuing to take in credit. We took in an extra about $60 on this trade. We're trying to play USO moving higher, try to hedge our position just a little bit, and rolled that position up. Now, USO did move down towards the end of the day, so this works out well for our position.

We just need USO to trade between 18 and 21-1/2 between now and expiration. Earlier in the day, it was trading above 21-1/2, so now let's move back in. We've already taken for this credit. It should work out to our favor. As long as USO trades inside this range we should have a pretty decent trade on our hands, but that's exactly what we did. We rolled up our strike from 18 closer to the market, to 21-1/2 which turned out to be an okay trade.

The other trade that we did is we did the same type of action with FXE. As FXE is continuing to rally, we rolled up our 107 puts to 110, and so that gave us an extra 38 cents in credit for each one of those FXE puts that we rolled up. The Same basic action is happening on FXE. Let me just take off the June position. You can see now with FXE, because we rolled up for such a decent credit, we've cut our potential loss almost in half, or a little bit more than half if FXE does continue to move higher between now and expiration.

We rolled up our 107s all the way up to 110. This gave us again, a nice little range here still to make money if FXE moves down and helps reduce our potential loss if the stock does continue to move higher. Again, at this point, we can't do anything. We don't know where the stock's going to go. We can't force the stock to go lower.

All we can do and all we should be doing is playing defense first, reducing our possible risk where we can, and still giving ourselves an opportunity to make some money, which is all we can do at this point with nine days to go. I know that was a little bit longer of a video. Hopefully, you guys enjoyed that, going through all the different trades that we had.

As always, if you have any comments or questions, please let me know by adding them in the comments section right below the trading alerts here on this page. If you need any other help this week with earnings, please shoot me an email. I've been getting a lot of emails back. I'm trying to get through them as quickly as I possibly can to make sure everybody is getting their questions answered promptly. Until next time, happy trading.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.