Our series on Option Buying is now in its 10th month.

Out of 9 months 7 have been profitable and the amount of profit is worthwhile.

With all our best efforts, many of the trades end up losing money. Not something uncommon but to some readers it is worrisome.

Readers have appreciated the method of selection, selection of trades and some of them made good profits also. Many are still not convinced by the process of not caring for the trades which go wrong. They ask the question– Why do we not cut our loss and exit the trade and save some money?

A perfectly valid question.

This is what every book and guru on trading has told them. But the problem is that they have not learnt from the books and gurus correctly. Fault is not with the teacher, it is with the learner.

The teacher says — Have a stop loss before you enter into a trade.

The teacher never says to reduce your stop loss from the original figure unless the trade has become profitable. You do not want to be stopped out with every small move.

I tell the same thing here. If you buy a PUT or CALL for Rs. 10000, this amount is your stop loss. Option Buyer can not lose more than the premium paid. This is our fixed stop loss.

We shall take care of the trades that are going right. We know what the wrong trades can take away from us.

This was a comment from one of the readers recently :

  • arnab

    Why are you keeping on holding stocks even its in uptrend when you have purchased put options? Don’t you feel you should cut your losses and move on?

    My reply to this was:

    Dear Arnab,

    I appreciate your concerns. The point I wish to make is that if I start getting out of every trade that goes wrong for some reason or reversal , I will never make money. I have stated many times that the entire option premium is my stop loss if the trade goes wrong. On many occasions the option came back into the money, most recent being ZEEL PUT 420 in January. From Rs. 5.00 it moved down to Rs. 0.70 and then the crash happened. PUT 420 moved up to Rs. 120. What would I gain by exiting at Rs. 0.70? A single turn around like this ( or even smaller than that ) can take care of 10 -12 wrong trades.
    Why mend some method which is making money?
    Cheers.

    I am now giving an example from previous month where staying in the trades helped in a really big way. Had we exited the trades, we would have suffered a big loss. Options can be very volatile and money lost over a week can be made in a single day.

    What Happened in June 2018 ? :

    This was the situation on June 22, 2018 ( Friday ) , four trading days before June Expiry:

    A loss of Rs. 40000 with most of the trades gone wrong. It was a desperate situation.

    What did we do to get out of this mess?

    Did we just exit and salvage the trades gone wrong ?

    The answer is — NO.

    We took few more trades two days before expiry which did well but for these trades we did absolutely nothing. We do nothing when trades go wrong and we do not jump with joy when they go right.

    Market did what was required, we did not have to lift a finger except closing the trades that came back into profit and they did.

    This was the result after 4 days at Expiry.

    Same trades. Nothing added.

    A profit of Rs. 55000 was the result.

    Too much action, active trading, worrying about small losses does not lead us to profit. Patience and belief in your method does. Rather than booking losses and exiting, develop the belief and practice the patience.

    Believe me, I have experienced such situations multiple times. Rewards are great when you come through it. Losses hurt when you fail like we failed in August 2018. But mostly such failures shall be followed by a big success next month.

    In June 2018, the blog was new. Option Buying Series was just one month old. A big loss in the second month would have scared away many readers.

    I had the belief and conviction to enter new trades two days before expiry while still in loss. In the end it was a winning month with very good profit to show for our efforts.

    Conclusion :

    Option Buyers have the advantage of knowing their maximum loss at all times. It is the profit part that needs managing.

    There is no gain without some pain. Trades will go wrong before they become right. Do not start running away with every wrong move.

    Learn to live with the fluctuations in prices. That is what market is all about. We make money because of these moves , then why worry when we lose some of it because of the same moves going against us.

    Learn to bear the heat or get out of the kitchen.

    Enjoy your Sunday.

    Back to trading on Monday morning.