Waiting On HON…

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 “Tuesday Trade,” I want to outline my trade in Honeywell (HON).

Honeywell is a household name for many, but some people might be surprised to learn that it is more than just a sanitation company. Honeywell’s interests also includes aerospace, building technologies, safety solutions, and more. Due to their variety of areas of business, I’ve found them to be a good ticker to trade.

Last month, I saw that HON was in a multi-timeframe squeeze. As a momentum trader, squeezes are one of my favorite setups and I could not resist. I decided to add two butterflies into my portfolio — BUY +2 1/3/2 ~BUTTERFLY HON 100 17 SEP 21 232.5/230/227.5 PUT @-.63 limit order (LMT). 

Note: Ideally, I would have liked to add a put credit spread as well, but premium wasn’t high enough so my risk-reward would have been too skewed for my liking.

My idea behind this trade was to have HON hover around the $230 price point. If it did end up trading higher, above $232.50, then I would still be able to take in my credit. This trade was bullish in nature and my risk was below $230. Pictured below is my HON option chain.

The following Friday after my entry into HON my trade was quiet, but still looking good. The market was slightly up and HON was holding nicely at the 50 simple moving average (SMA) so I felt comfortable holding my position over the weekend.

The following week is where I started to get into trouble. The indexes were beginning to diverge slightly, and the Nasdaq was being carried higher by the likes of Netflix (NFLX), Tesla (TSLA) and Apple (AAPL). However, there weren’t many stocks getting love, including HON. Honeywell had gapped below the 50 SMA and it was looking like this trade might not pan out. However, I decided to hold. Reason being, when there are big gaps, I generally think it’s better to wait and see if they have a possibility to recover. If the market decided to rally, I would have hated to cut my losses here when it’s almost at max loss anyway. Instead, I was hoping there was enough time for recovery.

Unfortunately, HON was not able to turn around and the following week I had to close out my trade for a loss — SELL -2 1/3/2 ~BUTTERFLY HON 100 17 SEP 21 232.5/230/227.5 PUT @-2.40 LMT. The $200 more I could have lost was worth me seeing this through because I have had trades turn around, but ultimately this one did not work out. No trader can win 100% of their trades, but the lesson here is to be mindful of market gaps and as always, never open a contract you cannot afford to have a max loss on.

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