Sorry for the harsh tone but naked strangles and newbies do not go together. The loss you took on paper is easily brushed off because it is only paper. It means nothing to enter another trade with the same potential for loss because you are just learning. However, coaches always tell their players that the way they practice is usually the way they play. If the practice loose and walk through it, they will usually be that way in the game situation. So loosely trading these positions and discounting losses is letting you develop bad trading habits. If a strangle blows up like that, then you need to think about ways to reduce the risk or better manage the position. You seem to be reaching for the premium without regard to the stock.
The stock you chose had two large price gaps in the past 4 months, the kind of moves that would blow up a naked strangle. ou are using 5-point spreads which means the stock only has to move a little to produce a loss and the stock has a history of price swings. I am not saying this position is a losing one, but you are playing these rather loose on paper and therefore are enforcing bad habits that will be ingrained at game time when real money is on the line.
Is it nice to blow off $4,000 in losses and just state that it will take some premium selling to get it back. What if the next stock gaps 10 points and the third one 5 points. I think experimenting with paper trades is a good idea for learning but my comment was direct in that I do not see any lessons learned from your trade but rather a "Hey it aint real money attitude".
Remember you play like you practice and if you treat it as fake money you will never develop the risk management discipline that is needed for selling naked options.
So do not just sell another strangle and brush off those losses. Investigate other ways to trade a stock you expect IV to drop and for the movement to be quiet. What about certain types of calendars, condors, butterflies, etc...
It is paper money but it is real education and if you fake your way through it, you will not perform when real money is on the line.
Quote from knocks420:
Seriously coach, chill...
I realize that it has gapped in the past. I entered this position based on a low ratio of historic versus implicit volitality, as were the other two: RMBS & PFE.
Lesson learned here was to check for fundamental catalysts to signal a large price change. This being a pharma company, something like a Phase III trial could do the trick.
As for the new strangle, implied volatility is still high and I don't think there will be another huge price catalyst for at least a few months. I could easily be wrong but its only a paper account and used for experimenting.
