Inexperienced Trader Question

T

Trader5287

I am an unseasoned trader. I have found myself in hot water with two short positions. I am short 400 shares of Overture (OVER) at an average of say 29 (closed @ 32.50 Friday) and short 1000 shares of Rambus (RMBS) at an average cost of say 7.20 (closed at 7.50 Friday).

I believe in the positions I've taken but the market is rallying against me. I let solid research suggesting unsustainable price but also feelings and ego to overcome prudence and did not cover when the loss was more manageable.

Without asking traders here to waste time looking at the actual prices for options on my two stocks, I wonder if there is a generally accepted approach
among option traders facing a like situation with underlying stock that is against them to add some measure of insurance against further deterioration. The drawdown would be little over 1K just to cover my way out which I am certainly willing to do and have planned for in my education. I'm curious though what the options trader's guidance would be in fighting back when you are the last man standing that thinks you are right.

Thank you.

Geo.
 
Whenever you take a trade you should plan ahead what your sell point is - for both up and down - you can revise the in the money position, but never revise the losing money position

If you feel the trade has got away from you - just sell it immediatley and then analyse where your mistake was - that way you profit from the loss

taking a loss is only a problem if you feel it is a problem - losses are part of trading - so if you feel it is a problem - close the position immediatly

trading is about winning the war - not each battle!
 
Let me suggest the best defense-get out of your position. the risk reward scenario on the two trades are just too great on the risk side . Why short a stocks that has already gone from x to under 10$.

If you still think that it is a short then buy puts-this way your loss is limited. If you still refuse to part with your ego, and your short stock position, then buy out of the money calls on the two stocks. By being short stock and long calls, you are synthetically long puts which means if stock screams up you are SOMEWHAT protected since your calls will start to appreciate. The problem is that you have to keep buying the 'insurance' calls every time the old ones you bought expires.

Good luck
 
I was short over 4,000 shares going into this morning and subsequently flipped most of them long by days' end. I lost $1,000 on the reversal but made about a $1,000 from my longs performing well. The only reason I'm even for the day is I had a plan for the market going up or down ahead of time. Sounds like you need a plan before you take positions in the future (if you want to do this long-term).

I think even though your stocks deserve to be crucified, this market has some steam behind it now and after today's solid close we're probably looking at gaps up Monday, or at least a continuation day. This will most likely carry your stocks higher with it. Why not exit and wait for a better entry? If you have a longer term horizon (days), then try waiting to renter when the stocks close below the previous days' lows, and place a protective stop at the high for the last few days. Then make sure you use a wide enough trailing stop to catch 2 to 3 times your risk on the trade on the way down. At the very best you have a 40-50% chance of making money doing this, but in the long run you have a better chance of making money. I don't use options, but if it only costs a thousand to put them on, and your planning on making $3,000-$5,000 before expiration then thats a good risk/reward play as well.
 
Trader5287, if I were you I would cover both positions immediately. As a matter of fact, I am thinking about taking a long position in OVER. Both stocks might or might not be worthless a year from now, so if that is your timeframe, ignore all I am saying. But for the next few weeks, my technical analysis suggests a rise in both stocks. Of course I might be wrong, and in that case I bet the downward move would be pretty strong, since false signals are usually the strongest.

Again, I have no idea about those companies' fundamentals or news, I'm talking only about what I see in their daily charts.

RMBS looks like it has relatively reasonable (low) option prices for 7.5 calls. You can buy insurance by purchasing 10 calls at a strike price of 7.5. You will also have to select the period of time for which you want the insurance. Theoretically, all the RMBS 7.5 call options that expire this year are currently equally fairly priced, so it's up to you. Select the date by which you would like to see the drop in stock price, for example May. Then you buy 10 May 7.5 calls and pay probably a little more than $1000 for them. That means, you will not lose more than what you have already lost plus those 1000 bucks, even if RMBS climbs to 100 in the next two months. But on the third Friday in May you will have to make different arrangements. Either buy a new option (continue "insurance coverage") or exercise your option, which will get you out of your RMBS position.

I think OVER options are also OK priced right now, so basically the same thought applies to that position.

As you see, options in those highly volatile stocks are quite expensive, so as an alternative strategy, you could sell covered put options against your positions to generate at least a little bit of income while you sit on them: For example, you could sell 4 April 20.0 OVER puts for a total of about $300 and wait for it to expire. If OVER stays above 20 for the next 7 weeks, you get to keep those $300 as the option expires worthless. If OVER drops below 20, the option will most likely be exercised, which means you are forced to cover your position at a price of 20, but you still have a nice gain on your short stock position, and you still keep the $300 from the sale of the put option.

In essence, you can keep selling puts against your position and generate a stream of revenue indefinitely (until one of the options is exercised, which gets you out of OVER at a profit.

The difference between the two strategies I described is that in the first case you want to protect yourself from huge adverse movements in the stock (a simple stop-loss would do the trick too), while in the second case you just keep waiting for a move in your direction without protecting youself against huge adverse moves, but you get paid for waiting for the stock position to move in your favor.

One more thing: If you decide to cover your short stock position before the put option that you have sold expires, you should buy back that option, otherwise you might incur a great loss if the stock keeps dropping sharply.

I personally think, the best way to trade options is to sell them and wait for the expiration, since the spread is usually rather high and most options are currently overvalued. The latter statement is not true for OVER or RMBS, which are highly volatile and therefore do warrant high option prices.
 
I think the earlier posts are right-on. Why tie up capital hedging the stock with option position. The cost of the options will make any gain unlikely. The trades clearly didn't go your way so get out and put the capital on a better horse.

Good luck.
 
I just looked at my implied vol charts on RMBS and just want to give you a heads up on the RMBS options implied volatility -which is a measure of how expensive or 'fat' the option premiums are on a particular stock. RMBS options are trading at a 2 year low with its high around 151% and low of around 55%. Currently it is around 59%, so I would'nt sell options, way too much risk and not enough reward on the premium received. Just get out of position or BUY calls.

Listen to most of the traders here. They mean well (as I do) and collectively they seem to have years of experience behind them. I have 14 years myself.
 
You should have determined your exit prices (stoplosses) before you put on the trades, written them down, and when the price rose to meet them you should have covered with a hearty yell "I AM OUTTA HERE!" You've got to be able to take losses. Besides, you can always re-enter later and it will only cost you the old in-out comission to sit on the sidelines for a while. What's that, $10-$20 bucks?
 
Originally posted by Trader5287
feelings and ego to overcome prudence and did not cover when the loss was more manageable.
More...

so now that the loss is larger you want to hold on? hey, it has to go down eventually, right?. now your wish trading. sounds like you also may have added to a loser. you need to get out of these positions. the market has told you that you are wrong. learn from the mistake(s) (also don't repeat them) and look for new trades.

just curious why your positions are fairly large if your an "inexperienced trader". learning these lessons on 100 shares is just as effective and a lot less expensive.
 
Trader5287,

The moment you cover your shorts on those two stocks,
they will start to go down. :)
It's happened to me too many times to count.

It's going to be over for RMBS with INTC pushing DDR.
Once they lose that BS lawsuit, RMBS will go out of business.
But before then, it can do anything.

Always make sure you have a stop when you put on your trade
and exit immediately without hesitation when it hits it. You can
always re-enter when it looks right again.
 
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