Can You Fix a Broken Trade?

Yo Pit Crazies

 

The VIX was at 16 last week and all was moving along nicely.

 

Then …

 

Inflation! Middle East Violence! Elon kicks Bitcoin in the shins! 

 

A trio of volatility events vaulted VIX to Zone 4 (that’s above 23).

 

This week, VIX broke 27, the S&P 500 (Ticker: SPX) fell 150 points and the wreckage was everywhere. 

 

Broken trades, broken hearts, broken dreams … 

I can help with one of those.

 

How to Fix a Broken Trade

 

First in fixing a broken trade, what is the goal? Mine is to get back to even and start making money without putting more dollars at risk. There are two things all traders need for that:

 

      • Don’t run out of time
      • Don’t run out of money

 

Not running out of time means extending the length of the trade without overextending the risk involved.

 

For example, if I sell a put, I know that is my maximum risk. From there, I can reduce risk by making it a put vertical spread. Or I can buy a put with my stock purchase if I am put the stock (meaning I am assigned the short put) like I examined in the Trading Legion this week

 

This extends the time to succeed and caps the risk and if your investment thesis is good the stock should recover.

 

Not running out money means not over-allocating to one trade idea. If I can’t take delivery of a short put, I don't sell it.

 

One way of controlling risk is just doing smaller trades so that one trade will not lose any more than another trade will make. Since crazy things can happen in a market, allocate dollars to a trade assuming those things will happen … and there will be plenty of money left in the account when the opportunities arise.

 

These are what I call defensive trading rules. I will outline a more offensive repair trading strategy in the The Power Moves Portfolio below.

 

The Rundown

Trading Legion:
The Trading Legion is an intermediate-level education and a long strangle trading vehicle. The goal is to teach students the best times to buy options.

      • I was able to close the last SPDR S&P 500 ETF Trust (Ticker: SPY) May21 415/400/385 put fly for $4. The trade is up 15% overall, and now I am looking for a push higher as I own the 421/431 for a credit.
      • I sold the General Electric (Ticker: GE) Jun04 13 puts yesterday. I am still long the Jun18 14 / Jun18 9 puts and I keep selling the 13 puts on dips.

 

Pro Trading Room:
This is Option Pit’s live access to Mark and myself during trading hours. Our Pro students post trade ideas with Mark and me all during the trading session. Look for a Pro Trading Room Trader Profile this weekend!

Trades from yesterday:

      • One of the traders likes the long AMC Entertainment (Ticker: AMC) May21 12 put and 13 call for 3.30 for a two-day hold. AMC is under the big short squeeze again.

      • I finally sold my Fastly (Ticker: FSLY) May21 30/35 call spreads at .35 and hope to own the shares for just below $35. I will keep the 30 puts going as a hedge.

The Power Income Portfolio:
Frank Gregory and I run a portfolio approach to trading options with stocks that have good long-term prospects based on Frank’s K-Street knowledge and my option expertise.

      • I added the General Electric (Ticker: GE) risk reversal to the The Power Moves Portfolio Starting Lineup. GE should be the beneficiary of a wind farm on Cape Cod Sound so the Green part of GE’s business gets a place in the portfolio.

I bought 5 GE Jun04 14 calls and sold 5 GE Jun04 13/10 put spreads for a .23 credit.

      • I took delivery of PLTR shares last week and own the PLTR Jun17 puts for 1.00. I still own 4 of the PLTR May21 24 calls from the strangle.

        OK, here’s the repair strategy for Palantir (Ticker: PLTR)

As PLTR rises Friday, I will buy 2 PLTR Jun18 20 calls and sell 4 PLTR Jun18 22 calls for a credit. This will double my upside potential and could leave the trade nicely green going forward. Look for a video on this technique soon!

The Power Moves Portfolio Starting Lineup
Here are the current open positions …

Volatility Edge/Volatility Trading Club:

The Option Pit VIX Light is still yellow and Mark could flip to red if VIX drops back under 20.

There was quite a range for VXX

iPath Series B S&P 500 VIX short term VIX futures ETN (Ticker: VXX) 5-day chart

In the Vol Trade Club, Trade No. 245 is up 20% and owns 5 VIX May21 35.5 puts for a credit. If VXX goes really red, I can see a 100% profit here with VXX at 35, which is where it was last week.

Remember, a lot of vol strategies I use are market neutral. That means if SPX or VIX go up or down, the positions still make money. This is a technique you can learn in the Volatility Trading Club and Volatility Edge!

Robinhood Trader:
Option Pit CEO Mark Sebastian uses the Robinhood Radar to find order flow in active names.

      • 5/12/21 Buy to open 6 SPCE Jun04 15 Puts pay $0.80 maximum $0.90-filled $.77
      • Mark closed half this position this week for 50% gain!

Like what you're seeing? Have more questions? Drop a comment below!

To Your Trading Success,

 

AG

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