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Losing money even when you’re right

A Tuesday Trade Edition: One of the most important concepts in trading is to review your work, and learn from the good and the bad. It’s critical to identify what’s working — to do more of it. Each week, you’ll get a trade from my trading journal, in which I explain my whole thought process from start to finish. Trading is all about finding something that works, and applying it, over and over again. That’s how you find trading success. So study up on this “Tuesday Trade” and let’s get to work.

In the options world it’s just as important to look at your losers as it is your winners. The reason why? You can absolutely have a great setup, the trade idea can be good, but then the execution still won’t be ideal.

When we’re trading options, it’s very important that we get our timing right. And it’s important to understand as a trader that it’s important to get your ticker right, it’s important to get the setup right… but a really key component to get right is time.

Here’s an example of why…

Time

If you don’t time it properly, or pick your options contract properly, then you can still lose money — even if everything else is good to go. I know… I’ve done it countless times and I’ve seen it even more.

How can your idea be perfect and still lose money?

Let’s take a look at my recent trade in Peloton (PTON):

As a brief recap, I got in on June 2nd and got out June 17th. I got in for $2.50, took about a 50% stop, and got out at $1.17. That equated to a little more than 50% loss.

The reason this lost money?

I didn’t give it enough time. So let’s start from the beginning.

I got in on June 2nd, and it was a typical setup that I like to use for short interest setups. Plus it was also a COVID stock, meaning there was also high short interest, volume, and momentum (plus a squeeze). Everything was looking great, and it’s something I trade all the time so I wasn’t too worried about it.

Now based on my analysis a lot of the times what you’ll see is when the ticker starts to trade higher, you’ll see volume and momentum, and when a ticker comes up to a previous all-time high, it’ll break through and go directly to your target. So for that reason, when I was getting long on June 2nd, I picked an options series that was expiring on June 19th. Because I thought surely that’ll be plenty of time to make my price target — but unfortunately I was wrong.

What happened?

The price came right up. Tested the previous all-time high. Pulled back. Then went through the high.

I’ve found this to be a really common mistake that traders make all the time. And the irony about this, is I was 100% right about my target ($55). But I was wrong about the time. It happened a day later.

My options expired June 19th, and I closed them for a 50% loss. And yesterday, June 22nd, Peloton gapped up almost 6% during the day. So if I’d given this trade even one more week, I would’ve had a massive winner as opposed to a 50% loss. That’s why I wanted to talk about it.

How to avoid doing this?

Typically what I do is I look at what the setup I’m trading is. This example was a daily squeeze. I think one of the hardest parts of the squeeze is you don’t know how long a squeeze will be in a squeeze. Then when the squeeze fires, it usually fires for about 8-10 bars. But you can be in a squeeze anywhere from 5 days, to 30 days, to more. So for this example, it squeezed from June 2nd until June 22nd (20 days)

So typically on a daily chart you want to give yourself about 30 days out for the squeeze. Another ironic thing about this example? I didn’t even follow my own rule (no wonder it didn’t work out). I was being cheap, and you know why? Because the options that expire sooner are usually cheaper.

In the end the setup came through perfect, but I didn’t have the options anymore, so naturally I lost money. So this is an example and a lesson as to how you can lose money in the options market even when you’re technically “right.”

3 thoughts on “Losing money even when you’re right”

  1. Great analysis! I can’t tell you how many times I have been “right on direction”, but wrong on my timing. I recently started using Raghee Horner’s 45-60 day rule when buying options, and my results have improved dramatically

    Reply
  2. Thanks Danielle – this is how we learn as traders. The important thing psychologically is that it was a good call by you so you should still feel ok. Too often we shout about our winners but they are just lucky, based on bad decision making and it cons us into thinking we are good.

    Reply
  3. I really appreciate you sharing this. I recently did the same thing in another name. A few days later it jumped directly into target. I actually did this a few times in the last months. Thanks for reminding us more time is better.

    Reply

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