UHN Looks Good, Then Gaps Down

Hey 5-Star Trader,

“Tuesday Trade” Journal: One of the most important concepts in trading is to review your work, and learn from the good and the bad. Identifying what is working is critical — to do more of it. So, to lead by example, each Tuesday, you’ll get a trade from my trading journal, in which I explain my 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.

For this week’s example, I want to break down a losing trade in UnitedHealth Group (UNH) and how I mitigated my maximum potential loss. After all, studying losses is just as important as studying gains when it comes to improving your trading!

Hunting in the healthcare sector… 

Near the beginning of June, I started to look at the healthcare sector. I knew these tickers would start their “run into earnings” setups soon, and saw UHN was in a nice squeeze. Taking that as a good sign, on June 8 I opened an unbalanced butterfly ─ BUY +1 1/3/2 ~BUTTERFLY UNH 100 18 JUN 21 405/400/395 PUT @-1.10 limit order (LMT). 

This was a directional trade using a low-risk unbalanced butterfly and my idea was that it would stay around the $400 strike price and theta would decay on the way to expiration.

Pictured below is my options chain, and I did risk the full amount.

Fluctuations shouldn’t scare you… 

Several days into my trade and UHN was experiencing some fluctuation, but I wasn’t worried. It can seem stressful with a ticker hanging out with price between the legs of the spreads but that is what it’s supposed to do. The price has to be there for the decay on the short strike. The point of the unbalanced butterfly is to place it where price is sticky so even though they are showing slight losses it’s just because it needed more time to work.

A change in direction… 

More than a week into my trade and UHN was looking solid, hovering right around $400. Then all of a sudden, at the market open on June 18, there was a huge gap down. Now, my trade was sitting at a loss. 

I waited a few minutes to feel out the market, but after 30 minutes I decided I better get out of this trade — SELL -1 1/3/2 ~BUTTERFLY UNH 100 18 JUN 21 405/400/395 PUT @-3.45 LMT.

How to mitigate loss…

My original plan was to wait and hold this trade until the end of the day because theta doesn’t decay enough to get out earlier for a profit, but the market’s temper had other plans for me. 

Since I took in a $1.00 credit, and exited for $3.45 credit, this equated to a $2.45 loss on the trade. By getting out early, I was able to avoid the max loss, which would have been an exit of $5. Sometimes the market has different plans for you and knowing when to get out is a crucial skill to have!

Taking a loss can be hard, but sometimes it’s the right thing to do. Don’t let emotions steer your trading in the wrong direction. Take my Trading Psychology course and beat your “Trade Monster!”

Up Next...

When a Ticker Makes Targets

Hey Traders! On Monday, I sent you a video about my short-term setup in Tesla, along with my $250 price target. You can check it out in the Tweet below… Since then, the squeezes I noted fired to the long side, and Tesla traded directly to my Fibonacci price target at the 1.272% extension level. … Read more

Read More

A Trade Setup in TSLA

Good morning, traders! The Nasdaq futures are choppy at 16,000 after making quite the run. So, what’s next? Looking for the next round of setups, of course! When tickers and indexes get sticky, squeezes will start to consolidate. Those squeezes generally occur on the lower time frames first. When those squeezes fire, they can either … Read more

Read More

The Microsoft Effect

Hey traders! Microsoft made a new, all-time high yesterday and may very well take the Nasdaq along for the ride. What is next to come in Microsoft, the Nasdaq, and more? Check out my video update below:

Read More

Subscribe Today!

Want my up-to-date analysis, setups, top trading tips, and more? Be a Five Star trader, and join my free newsletter today!

Sign Up Now