In the video by Options with Davis, you’ll find valuable advice on how to manage huge losing positions in trading. The video covers various reasons for large losses, such as having a too big position size, turning defined risk strategies into undefined risk strategies, refusing to take a loss, and lacking a plan to manage losers. It provides practical solutions, including reducing position size, sticking to defined risk strategies, knowing when to take a loss, and having a plan in place. The video also addresses a viewer’s specific situation with put options in Tesla, exploring the possibilities of salvaging the positions and the implications of rolling them down. Furthermore, it offers tips to prevent large losses, like trading small, diversifying strategies, trading index ETFs, and having an exit plan.
Reasons for Large Losses
Position size too big
One of the main reasons for experiencing large losses in trading is having a position size that is too big. This is a common mistake that many new traders make, as they may allocate a significant portion of their account to a single trade. By doing this, they are putting themselves at risk of blowing up their account if the trade goes against them. It’s important to always trade with a manageable position size that aligns with your risk tolerance and overall trading strategy.
Turning defined risk strategies into undefined risk strategies
Another reason for large losses is when traders turn defined risk strategies into undefined risk strategies. A defined risk strategy, such as a bull put spread, has a maximum loss that is defined from the start. However, some traders may try to turn this strategy into a short put to avoid realizing a loss. By doing so, they expose themselves to potentially unlimited losses if the market continues to move against them. It’s crucial to stick to the original risk parameters of a strategy and not try to manipulate it to avoid taking a loss.
Refusing to take a loss
Sometimes, traders refuse to take a loss and instead continue to hold onto a losing position in the hopes that it will turn around. This can lead to even larger losses if the market continues to move against them. It’s important to have a predetermined exit plan in place and to stick to it. If a trade is not going according to plan and is resulting in a significant loss, it may be better to cut your losses and move on to a new trade.
Lack of a plan to manage losers
Lastly, experiencing large losses can be a result of not having a plan in place to manage losing positions. Without a plan, traders may not know when to cut their losses, when to roll a position, or when to exit entirely. Having a clear plan for managing losing trades is essential for mitigating losses and preserving capital. This plan should outline specific criteria for taking action and should be followed consistently.
Options to Salvage Positions
Reducing position size
If you find yourself in a large losing position, one option to salvage the position is to reduce your position size. By reducing the size of your position, you can help minimize the potential loss and protect your capital. This can be done by selling a portion of your position or by closing out the entire position and reallocating the capital to other trades.
Sticking to defined risk strategies
To salvage positions and prevent further losses, it’s important to stick to defined risk strategies. Defined risk strategies have predetermined maximum losses, which can help limit potential losses. By using strategies such as credit spreads or iron condors, you can define your risk and protect yourself from excessive losses.
Knowing when to take a loss
Knowing when to take a loss is crucial in managing losing positions. If a trade is not going as expected and is resulting in significant losses, it may be necessary to cut your losses and exit the trade. By taking a loss early, you can prevent further losses and free up capital for other trades that have better potential.
Having a plan to manage losers
Having a plan in place to manage losing positions is essential. This plan should outline specific criteria for taking action, such as when to cut losses, when to roll a position, or when to exit entirely. By following a predetermined plan, you can make objective decisions based on your trading strategy rather than emotions.
Example: Put Options in Tesla
In the video, an example is presented where a subscriber asks for advice on their put options in Tesla. These put options were rolled multiple times during a 70% decline in the stock. The video discusses how the true profits of the position may be misleading, as rolling the position means that the initial profit/loss has already been realized. The cost price of the positions is around $300.
Selling a Put Option
The video also explores the possibility of selling a put option as a way to salvage positions. It mentions the implications of rolling down the position and the difference between cash-secured puts and naked puts. If the put option is cash-secured, meaning the individual has the cash to fulfill the shares if assigned, it may not be as bad. However, if it is a naked put, it could be more troublesome, as there may not be enough funds to fulfill the shares if assigned, and the individual could face a margin call. It’s crucial to understand the differences and risks associated with selling put options.
Strategies for Managing Losing Positions
The video provides several strategies for managing losing positions. These strategies include waiting until expiration, rolling down the position if still bullish on the underlying stock, reducing position size, and cutting losses entirely. Each strategy has its own benefits and considerations, and the appropriate strategy will depend on the specific situation and risk tolerance of the trader.
Tips for Preventing Large Losses
The video concludes with tips for preventing large losses in trading. These tips include trading small, diversifying strategies, trading index ETFs, and having an exit plan in place. By implementing these tips, traders can help reduce the risk of experiencing significant losses and better protect their capital.
Conclusion
Managing huge losing positions in trading can be challenging, but with the right strategies and mindset, it is possible to salvage positions and prevent future large losses. It’s important to assess the reasons for large losses, such as having a too big position size, turning defined risk strategies into undefined risk strategies, refusing to take a loss, and lacking a plan to manage losers. By implementing options such as reducing position size, sticking to defined risk strategies, knowing when to take a loss, and having a plan to manage losers, traders can mitigate losses and improve their overall trading performance. Additionally, following tips for preventing large losses, such as trading small, diversifying strategies, trading index ETFs, and having an exit plan in place, can further help protect capital and minimize risks. Remember, trading involves risks, and managing losses is an important aspect of being a successful trader.