$1,300 Loss In SCTY Realized

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Option trading loss: In tonight's video, we're going to go over all the trades that we made on Monday, January 4. So, Happy New Year. Welcome back to another trading year and hopefully another successful year here at Option Alpha. I've got a ton in store for you guys this year.

I know I talk about it last night a little bit with lead members on the strategy call that we do every Sunday night with them, but we've got a lot of things coming up in the books and the schedule for this year. Hopefully, you stay engaged, stay tuned.

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As always, I appreciate your guys' feedback and comments on everything. Please let me know what I can do to make this better and more helpful for you guys.
So lets start off tonight by going through some of the trades that we had. First one is Solar City. Now a bunch of different trades is actually in here.

It's, in my eyes, just kind of one rounding out of all the positions but we unwound all of your positions today in Solar City. The reason that we did that is not that the stock moved against us or anything. The stock helped us in a lot of different ways with a drop in implied volatility.

That helped out with our overall position, and the stock coming down from around 60 down to around 50, and so it's was around 50 or so today when we closed most of this position. Subsequently, rallied higher than that. But overall, the hedge in the adjustment trades that we made to this position after a huge run-up in the stock, and this is a move that you're not going to see often.

Maybe one time out of 100 or 200 times is you going to see a stock go exponential and go from basically $30 to $60 in less than 10 days. It's just a huge move, and you're not often going to see it. Of course, it ended up being a losing position, but the hedge trades and the adjustment trades that we made along the way did help reduce a loss significantly.

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I know one member emailed me and said they cut their loss by 4, making the hedge trade and adjustment trades, and I think it's a valid point. I through it in detail with lead members last night on the coaching call but it was nice to see the stock over the last 2 weeks or so come back down. That was helpful to see the stock come back down from 60 down to 50.

It's exactly where we want it to be. We had the short strikes at 42 and then 55. So anywhere around this 50 zone was kind of like our sweet spot and that's where it landed earlier today and implied volatility dropped as well. Again, there's nothing we could do beyond that. It did exactly what we wanted it to do given the circumstances.

The remaining position that we had on was inverted, and we had about $100 of potential premium that we could have still made. So had we not closed out the position and left everything one, we could have made maybe another $100 or so. In my eyes, it's not worth it with another 14 days or so to go, or 12 days until expiration, to leave that position on and kind of risk anything that goes along with that.

So we did unwind that today. We bought back our two 55 January puts that were in the money and then we bought back our 42 calls that were in the money and then also bought back our 36 calls that were in the money as well. I know a lot of people did sign on these. We did not.

I showed everyone last night the strategy call with the lead members. We did not get a sign on this, so we did buy back these 36 calls. If you have the short stock at this point, I'd say close it out unless you want to carry the short stock, if you're lucky enough to have it. I know that a lot of brokers were having trouble getting the short stock to borrow.

If you're lucky enough to have it and you want to carry it, that's you're a decision. I think you should be out of it at this point. That's what I'm doing going forward. At the end of the day, after all, adjustments were said and done, after all the positions, we end up losing about $1,300 on the trade.

So, not a trade that was a winner and a big losing trade but it was a stock that made a huge move against us. I won't go through my rant like I did before but keeping our position size small in this case helped us. To tell you the truth, all the other positions that we've closed out of that were profitable; I think we had 12 consecutive closing trades until today that were all profitable, more than made up for this.

So the key here is you have to continue to make more trades. You can't just let one Trade define your month, or define your year. You have to make trade after trade. It's just a numbers game. This business is nothing more than a numbers game. All right, so here's another trade we got out today. Another winning trade here, EWW.

We bought back our credit spread in EWW. This is an automatic closing order. We automatically set the closing price to 15, let it work with a GTC order. Got us out on a $70 profit. A quit little trade here at EWW. This one was just more of a stock moving down, and that was what we want to see, so we entered this position after the pop-up in EWW.

We wanted to see the stock move down, that's what it did. Implied volatility in the meantime actually kind of went sideways. It was down lower, and it did move lower, but it subsequently has popped up just a little bit, but most of the profit that we got from this is the move down in the underlying security. I think a lot of these ETFs, EWW, EWZ, some of these things I think may be starting to get towards an area that we could start getting some bullish positions on.

That may work well for our overall portfolio as well. I did make an adjustment to CMG today. This stock is continuing to move lower. CMG, I think, on the day was down $29 or so. I think it was something like that. It was down $29. Down a pretty big clip today. You can see right here on the chart here.

It was definitely down a big volume. Who knows if it's going to turn around. The best thing that we can do with this trade because we had the original iron condor is to sell the corresponding call spread right at the same short strike as our puts spread. So we had the 490, 495 puts spread. We sold the 490 call, and we bought the 500 call.

That gives us a little bit of a credit of 50 cents and helps reduce some of the risks in CMG. So when we look at our pay-off diagram here of CMG. Let me take out the adjustment trade here so you guys can see what this looks like. But we had the original position which was this. This was our big iron condor in CMG.

Nice, wide, and the stock has completely moved against us. Right? This is our short puts strike. Our puts spread here, and this is where the stock is trading right now, just below 450. Not to say it can't go higher but the only thing that we can do at this point is rolled down and come exactly where our short strikes are on the puts side at 495 and create an iron butterfly, and that's exactly what we did.

We can't go inverted here. We can't go inverted here because if you go inverted what is does is it flips your entire pay-off diagram, and it leaves you a big hole or gap in your pay-off diagram, and this hole or gap can be dangerous because it increases the risk that you have to the trade by going inverted.

So the difficulty sometimes in trading iron condors is that unlike a strangle or straddle where you can go inverted and still have an opportunity to make some money, with iron condors when you go inverted, you leave this big open gap or void in your pay-off diagram and that honestly creates a lot of additional risks and definitely creates additional margin exposure which you don't necessarily want if you're trading at risk to find.

So, as always, keep your position size small. Sometimes you're going to have trades like this, but from now on, for CMG, there's nothing else we can do except wait until expiration. If the position ends up being a loser, it ends up being a loser, and we continue moving on but we have to leave this position on because there is a chance that CMG in the next 11 days makes a huge rally, because it made a huge move down.

It can definitely turn around and come back up, and if it does and it lands somewhere in this range then we have an opportunity to take some money off the table and potentially make a little bit of money on this trade, maybe. But it's a very small chance. It looks like it's going to be a losing position, but we have to reduce risk, right?

We have to stop the bleeding some way, some how and this is how we do it. We have to roll down our call spread, turn into an iron butterfly and then from here it's all about patience. As always, I hope you guys enjoy these videos.

If you have any comments or questions, please let me know. Ask them in the comment box right below. 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.