Trade The Journey

Trade The Journey

AAL $14.50 CALL at $0.20 with an Expiration date of 4-6-2023

Trade Review on the Day of closing trade:

I didn’t have the right idea when taking this trade. The two other potential trades were a lot stronger trades, both would have ended in a profit. This trade was a bad trade not because I didn’t profit but because I didn’t cut my losses when I had the chance and I had several chances to close the trade. I just kept watching the trade lose money thinking, it can’t keep going down, it has to bounce up.

When the trade lost money the day before I closed the trade, I formatted the next day’s trading session strategy based on AAL testing a short-term resistance level. I remember looking at AAL as it reached the stop limit I set at a $20 loss and I just couldn’t bring myself to close the trade because I was so hopeful that AAL would bounce up once the economic data reports were released that showed a slowing economy. The reports showed that the economy is slowing but slowing at a faster pace than originally thought.  I’m not upset that I chose a losing trade, I’m upset because I didn’t close the trade.

Lesson: Work on closing the trade and never looking back. This is a hard skill to learn like letting your profits run but I feel once this skill is mastered, it will open the door to a higher level of trading for me.

Date Trade Opened: 4/4/2023

Date Trade Closed: 04/05/2023

Profit/Loss: (0.50)

The 15-minute chart of American Airlines (AAL):

The RSI faced resistance at the 50 levels. The trend also weakened to the upside and strengthened to the downside. AAL reached a low on Wednesday. From the high to the low is a fall of about 9.14%.

The Daily chart of American Airlines (AAL):

The trend is definitely neutral which I would have seen before entering the trade. A better strategy would have been a butterfly or iron condor strategy. The RSI didn’t establish any momentum and faced resistance at the 50 levels. The ADX was around 26 which indicates some trend. The DMI- is comfortably above the DMI+ which also shows that the trend is definitely downward. Volatility also edged a bit.

Now to the trade monitor charts. My two other trade ideas were bearish trades on Carmax (KMX) and Lennar (LENN). Both trades would have ended in a profit. I still am baffled that I chose to trade AAL when the two trades had a higher probability of ending with a profit based on the charts.

Below is the trade monitor table I created and as you can see I am adjusting it as  I learn new things about options. I can honestly say that options are a lot more complicated than I originally imagined. Notice on the second day of the trade how the gamma, delta, and theta all decreased. In an outright call or put position, a big gamma is a trader’s friend when looking for big moves in the stock.

The theta decreased because I had very little extrinsic value in this position, as the AAL fell further out of the money. As expiration nears the option will either have a delta of zero or one hundred. One of the metrics that kind of confused me on the forecast of direction is the low put/call ratio. Both carmax and Lennar had high put/call ratios, especially Carmax which had a put/call open interest ratio of 6.35 which can be read as bearish alongside the 1.43 put/call ratio.

Another problem with basing your trade strategy on the put/call ratio is that you don’t know if traders are buying or selling calls. They could have been selling calls which now seems more probable. As mentioned above in the trade review, I didn’t think the reports would damper market sentiment as it did.

Leave a Comment

Your email address will not be published. Required fields are marked *