How to reduce a loss

[tomorton]

Concentrating on the losing trades is the wrong focus in my opinion.

Losers are guaranteed to occur, you built them into your career when you started using a strategy that has less than a 100% win rate (which is all of them). As said above, just make sure they don't overwhelm your account. Focus your work and attention where you're winning, not where you're losing.

 

[ctheo1]

Hi everybody,
I am writing an example to learn strategies reducing the losses.
Please assume I have a stock (which is losing) in my portfolio.

Please assume I have bought it at the price 14 and the quantity is 100. Which strategies could I use in order to reduce or maybe reset this loss?

Hi OP - it seems like you're "in trouble" based on your choice of words. In my experience, the only thing you can really do is close the position and start over. Good luck.

 

[investing]

Thanks everybody and each of you for your answers . All of them were very precious for me.
Sorry for the words I have used in my messages. I haven't fluent English

 

[investing]

Lots of things you can do option-wise. One strategy is, if you want to buy more, you can sell a near money put and out of the money call on it. Preferably the call will be sold at a strike that, when called, will allow a profit from your basis. You will keep both prems. You will get two option prems every time you do this. The risk of course is if the stock drops a bunch more you will be assigned the put and have to buy at the strike. Still, if things don't go crazy, you will soon be able to (maybe) raise your basis to profit. You do need to realize that this strategy doubles your risk, but less than buying another 100 shares would. Good luck.

Thanks so much for the wishes and for this strategy. By assuming the strikes are available, is the following situation right? Are the strikes respecting the strategy?

Original price of the stocks bought = 14

Actual price of the stock = 10

Strike put to sell = 11

Strike call to sell = 15

What is the parallel strategy if I am short on the losing stock?

 

[investing]

sell a call at where you would be happy if the stock moved to.

Thanks for the help. If I am short on a stock (and am losing) then can I sell a put in order to recover the loss?

 

[investing]

Consider volatility position sizing such as standard deviation or Average True Range (ATR)

Thanks for the answer. About the Bollinger bands I know that when they converge the volatility is reducing. About ATR I know that when it’s high the market has increasing volatility. How can I use these information?

If you prefer, only a link can be useful for me to learn

 

[ET180]

Lots of things you can do option-wise. One strategy is, if you want to buy more, you can sell a near money put and out of the money call on it. Preferably the call will be sold at a strike that, when called, will allow a profit from your basis. You will keep both prems. You will get two option prems every time you do this. The risk of course is if the stock drops a bunch more you will be assigned the put and have to buy at the strike. Still, if things don't go crazy, you will soon be able to (maybe) raise your basis to profit. You do need to realize that this strategy doubles your risk, but less than buying another 100 shares would. Good luck.

If he's already losing money on holding 100 shares, I would not sell puts. If your risk is already to the downside, why add more risk to the downside? First thing I would do is evaluate whether I still believe in the trade or just want to get out. If I no longer want to own the underlying, then simply sell it. If I'm ok holding it, then I would sell a call. Maybe sell some shares or do both.

 

[Option_Attack]

If he's already losing money on holding 100 shares, I would not sell puts. If your risk is already to the downside, why add more risk to the downside? First thing I would do is evaluate whether I still believe in the trade or just want to get out. If I no longer want to own the underlying, then simply sell it. If I'm ok holding it, then I would sell a call. Maybe sell some shares or do both.

Yes, I agree. But the OP's question was how to possibly get out of the hole he is in. One way is to sell straddles or strangles against the shares. This is a slightly better alternative (imho) than doing something like straight "averaging down," which is another way to get out of a hole if you don't want to wait until (forever maybe?) the stock regains it losses. It's not something I would do. I don't hold stock, and only trade options. But for someone with tons of patience, you can definitely get back your money. But you better have a stock that doesn't go bankrupt!

Should he just sell and work on other trades? Probably, at least there is the tax loss to net against gains!

 

[ET180]

Yes, I agree. But the OP's question was how to possibly get out of the hole he is in. One way is to sell straddles or strangles against the shares. This is a slightly better alternative (imho) than doing something like straight "averaging down," which is another way to get out of a hole if you don't want to wait until (forever maybe?) the stock regains it losses. It's not something I would do. I don't hold stock, and only trade options. But for someone with tons of patience, you can definitely get back your money. But you better have a stock that doesn't go bankrupt!

Should he just sell and work on other trades? Probably, at least there is the tax loss to net against gains!

Assuming the stock recovers. I don't like buying more of a position that is already in the hole. I don't throw good money after bad unless I have very high conviction that the market is wrong...which would only be the case if I have insider information and know something that the market does not know. Agree with the rest. I always sell calls whenever I buy stock. Even if the calls are pretty far OTM. My favorite trade is selling 1 OTM call expiring about 50 days away for every 30-60 shares of stock. And then if the stock does not go higher, I start selling weeklies at closer strikes.

 

[DannoXYZ]

Yup, dollar-cost averaging is just rationalization and protecting ego. Plenty of stocks that went down and never recovered. Portfolios would be much better off having dumped these "blue chips": Enron, Lehman Brothers, GM, CitiCorp, US Steel, Eastman Kodak, Xerox, Polaroid, KMart, MCI/Worldcom. You can buy them on way down all you want and lose even more money. Would've been better to follow trend and shorted them.

As mentioned, OP's best play is to dump it ASAP and have clean start. Faster you dump losing position, the less you lose and more capital you have to fund next trade that would be profitable. Note that buying near-the-money put in this case might be profitable, but would really be considered the next trade, nothing to do with previous loss.