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Follow your plan and cut losses short

By Don Fanstone, Kitchener/Waterloo User Group Member

Put and Call graphicOption Blog April 5, 2015:

Cutting Losses:

The old adage: “If you keep making the same mistake, you’ll keep getting the same result.” This is never more-true than in the market place, whether it’s trading shares or options. If there happens to be anyone out there in Blog-Land who has experienced the round trip or taken a large loss, you know what I am referring too!

If there is one benefit to writing this weekly blog article, it is to make me more diligent to follow the Trading Plan. Each time I deviate from the tried and true, I keep getting the same lesson. Cut the losses short. We can’t change the past, but the Trading Plan can be followed more astutely in the days to come.

If you want to be a winner in the market place; Follow Your Trading Plan.

Buy in a Rising Market:

  • Green Light Buyer, or DEW Signal, or Confirmed Up:
  • The Price > 30 Day Moving Average
  • The DPO > 0

Sell Considerations:

  • 25% or greater profit.
  • Maintain one-half of your profit is the price is falling.
  • The Price < 30 Day Moving Average
  • The DPO < 0.

While there needs to be some leeway when the P < 30 DMA and/or the DPO < 0, it needs to be an amount that will cut your losses at a level that allows you to protect your capital and invest in rising stocks in lieu of holding onto losers and hoping to regain that which is lost. Act on what the market is telling you, do not “hope” for a better day tomorrow

VectorVest advised on March 20th, that Skyworks was the No. 1 stock for the week previous and recommended it for Prudent Investors. I purchased 5 Call Options on SWKS on Monday March 23th and sold them on Monday March 30th for a loss of $1075.00 (CDN). I believe that this was a good loss, the stock has continued to fall. Sometimes we get it right, and sometimes it turns around and goes up. The important criteria is to cut the losses short.

swks mar 2015 ii

On two other trades, I did not follow the Trading Plan to the letter, and took losses that were an expensive lesson. Fortunately, they were offset by several profitable gains, and the net gain for the month was less than could have been.

Sells for the Week of March 30th:

Sold 10 STN July 27 Calls @ $3.55.    Bought Feb. 6th @ $6.10 Loss $2,550.

Sold 10 MIC July 28 Calls @ $1.80.     Bought Feb. 27th @ $.70. Loss $2,500.

Sold 5 SWKS Aug. 85 Calls @$19.03. Bought Mar. 23 @ $20.70. Loss $1,075.

Buys for the Week of March 30th.

5 Can. Tire (CTC.A) August 120’s @ $15.90.

Canadian Tire last reported earnings on Feb. 26th.

Consider paper trading this option, and ask questions on the blog reply along the way to the next earnings release.

I encourage all to read Lee Lowell’s book “Get Rich with Options”, go to VV University and watch the Video on Options, and read Dr. DiLiddo’s article in the Views Manager under Special Reports, and attend the VV Options Course.

Understand Options Before you begin to trade, there is much to learn.

DISCLAIMER: Options trading involves risk and is not suitable for everyone. The information contained in this Blog is for education and information purposes only. Example trades should not be considered as recommendations. Options training is strongly recommended before placing any trades. VectorVest offers a basic options course online and occasional intermediate options workshops in Canada each year.


4 thoughts on “Follow your plan and cut losses short

  1. Thank you for sharing your experiences in option trading They are very informative and educational. Thank You

  2. Thanks Don,

    Excellent article. I was particularly interested in how you handle losing options positions because they can be so volatile compared to stocks. Now I will put this to work immediately.


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