Yesterday, this was one of the comments on the day’s post:

when i was quite new to this group, i remember i took a trade and it went just the opposite way, and when i wanted to cut the losses, i was advised to stick to till end of month and watch as many did so. finally, i came out of the trade, battered and bruised, lesson learnt: never wait, always cut your losses.

Right now, many readers would identify with this comment and the lesson learnt —- Never wait, always cut your losses.

What is meant by cutting your loss?:

To me it means not losing beyond a fixed amount. I believe the meaning is same for every trader. No one want to lose money even while knowing that losses are part of the game. So we would like to keep them known and quantified.

In Option Buying, we already know our loss. I always mention the maximum risk while entering a trade. When that happens it should hurt me and it does but why should I be revising it every other day?

The loss was my planned loss. It happened. I felt bad about it. Story ends there. Trying to save something out of it will give me a small satisfaction but is not going to make me profitable.

Let me clarify once again — I consider the premium paid as my stop loss amount.

Had we been trading futures we would be losing more amount on daily basis. Option Buying gives that comfort that the loss happens gradually over a period of time.

Anyway, in the current context of continued losses, this may look like a sermon no one likes to hear. But we need to put things in the right perspective.

The Right Perspective:

Everyone and his uncle tell us that — Option Buyers do not make money.

There must be some reason for everyone to say that.

Over a period of 28 months, we have been able to remain profitable in spite of recent spate of losses. We must be doing something right.

That something right is —– Focus on your right trades, do not worry about the trades gone wrong.

Right trades when they happen are what makes money. We have to ride those for the maximum advantage. We do not know how much they can deliver but we try to get the best out of the right trades.

Wrong trades can not give us more loss than we planned. So why worry about them?

This simplicity of thought and action is very difficult to achieve and option buying is not going to be a profitable pursuit without achieving this state of mind.

Some Actual Examples — Not Cutting The Losses And Running:

As an option buyer, if you keep cutting your losses and running, all you would end up doing is lot of running. There will be no profit after all the running and only satisfaction will be somewhat reduced loss in that month. The goal is to be profitable. Reduced loss is still a loss.

Here are few trades which made big gains for us, but not before they had gone into a big loss. Running away would have stopped our profitable journey many months ago.

May 2018 — M&M Call 900:

This was the first month of Option Buying series. It ended up profitably. That was a good beginning.

One of the trades was M&M CALL 900 bought at Rs. 12.00 and it was finally exited at Rs. 22.95.

Looking back it is a simple transaction which made some profit.

The reality was not like that.

The CALL had gone to a low of Rs. 1.30 and made a low of Rs. 2.50 even on the expiry day before recovering to a high of Rs. 23.95. We could exit at Rs. 22.95.

Running away would not have helped.

IBULHSGFIN PUT 1160 September 2018:

The example of M&M was not the one with a big profit. It was just to highlight the fact how waiting can turn around a trade. As far as loss was concerned, we had already lost a good part of it.

Let us look at September 2018, the month which was a huge success:

The profit in this month was Rs. 430000. Out of which the trade in IBULHGFIN gave Rs. 108000. It is really a good profit to have.

Did it come easily?

Not at all.

After buying at Rs. 13.50, it moved to a low of Rs. 1.80.

Made a high of Rs. 353 which I could not close and finally exited at Rs. 230 two days later.

Running away when Rs. 13.50 became 1.80 would have cut the loss, not given Rs. 108000 profit.

On September 21, the price opened at Rs. 6.05 and moved to Rs. 1.80.

Those who cut their losses and run, did not see the big profit which came very soon after they ran away.

These traders were not running away from the loss, they were running away from profit.

March 2020:

March 2020 was the biggest profitable month of this series. The month gave a profit of Rs. 492000.

Very good by any standards.

One of the trades was HCLTECH PUT 500.

It was bought at Rs. 6.00 on March 02, 2020. It fell to Rs. 1.20 in next 3-4 days.

No cutting , no running was done.

Finally the PUT was sold at Rs. 115 when the time came.

All this is already documented here in March posts so not repeating now.

To Summarize:

We know our loss already.

Reducing it gives a feeling of relief but does not make us profitable.

Profit comes from the trades that go right. Spending too much thought and energy on the losing trades is negative mindset and will not make us profitable.

We need to learn from our losses but learn the right lessons.

Remember, there is always a light at the end of the tunnel. Darkness is not permanent, light is.

Trade cautiously, trade profitably.