Trade The Journey

Trade The Journey

AAL – $14.5 Put Option – 1/13 Expiration – $0.30 Premium

Top of the Evening! I hope all is well. I decided to update this post tonight instead of waiting until the weekend because the trade is still fresh in my mind. AAL was trading near its 200 SMA moving average and had been on a steep trend to the upside for the past few days. This was a risky trade because there’s no telling how far up AAL could go as long as there were buyers to step in.

In the middle of November, AAL was in a sideways trend with the top of the trend reaching $15.19, which of course I didn’t see until reviewing the charts now. I only looked at the last couple of days and made an assumption that the steep upward trend AAL had been on would fizzle out once it hit the 200-day moving average.

I looked at the chart and made use of the risk-reward tool available on barcharts and decided to set the trade. I added Bollinger bands to the chart to see if AAL was overextended and the bands seemed to be confirming that it was. However, the timing of this trade proved to be the most challenging part of this trade. Perhaps, I should have waited for a better signal like an actual pullback by AAL.

The pink lines on the chart above represent the reward/risk of the trade. My stop loss was closer to $14.80 but you get the idea. Options are priced a lot differently from trading stocks so the reward/risk is much different but this gives me a general idea of what to expect.

Was it possible for AAL to fall back to $13.15? With the CPI report and Consumer Sentiment report due this week, I think it was possible.

AAL retreated a bit but later in the day it started to rally. The 5-minute chart below gives you a clearer picture of the price action.

I checked the charts this morning when the market opened and everything seemed to be playing out according to the plan.Its actually a beautiful trend to look at when you’re not getting killed in the trade. You can see a dip in the midmorning and then a rally to close out the day. The price action is on the far right.

Options Premium on the left axis and Implied Volatility on the right axis. Volatility ticked up as the option premium fell.

Volume and Open Interest are on the left axis and option premium is on the right axis. Look at that volume but also look at the open interest that remained into the close. It could be a lot of market participants like me that sold out of the bearish position but it also could be traders that sold the bullish put.

This trade was about as painful as it looks. The only thing that saved me from taking another huge loss was the stop-loss level that I originally set. This time, I closed the trade immediately instead of hoping that it would return to profitability. 

It may sound strange but I am proud of this trade even though this is my third losing trade in a row. I adhered to my stop-loss level set and didn’t look back. Had I would kept the trade on, it would have been catastrophic.

I lived to trade another day and that just might be more important in the long run, than just counting money from your profits.

Learning how to lose is a skill akin to learning how to win.

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