Trade The Journey

Trade The Journey

Trade Review for IWM this Past week

Trade: IWM

Option Strategy: Vertical Call

Option Leg 1: $196 Call

Option Leg 2: $199 Call

Expiration Date: 08-04

Trade Duration: Three days

Option Premium Paid: $1.60

Option Premium Received: $1.04

The hypothesis for this trade was that IWM (Russell 2000 ETF) would reach a new short-term high above $199 as IWM had attempted to break through twice recently. After last week’s profitable trade I felt that I had a short run on my hands so I decided to pursue the opportunity. One aspect of trading that novice traders fail to understand and at times I do as well is that you won’t know if the trade will work unless you put the trade on.

No amount of analysis can cover the uncertainity in market activity. In the past, I analyzed the trade to try and weed out the uncertainity so that a profitable trade was all but guaranteed. But I realized this wouldn’t work because some event always arised that I couldn’t foresee. Sometimes the event was in my favor and sometimes it didn’t.

With experience, I learned to just place the trade and instead of overanalzying the trade, I instead focused on analyzing the risk and what I would do if market conditions changed. This way I used my time effectivetly and alleviated some of the stress I experienced before placing the trade.

These past few weeks, volatility was near the lows and the indices were rising often hitting new highs as the possibility of a soft-landing grew stronger. With only a few earnings report due to be released during the week and the job market loosening in terms of tightness, I thought this past week would be a continuation of the uptrend.  Unfortunately, yields rose towards the middle of the week as the treasury announced an increase the amount of debt they would issue. 

Fitch also downgraded US debt from its AAA rating. The indices fell in tandem and my trade was pretty much dead in the water. On the second day of the trade, I knew that the only strategy I needed to focus was limiting my loss. On the open IWM gapped down after hitting a high of $199 overnight and my position was nearing a big loss so I decided to wait. At the open and before the close, the market is usually volatile and this has proved to be the best time to exit a trade.

This is another market skill that isn’t often talked about, Patience. Patience without panic takes time to develop but it is skill needed if you are going to become a successful trader.

After IWM dropped in the morning, I saw that buyers were stepping in at $196, so I decided to place a closing limit order at $1.04, hoping my trade would be executed. Luckily, someone took the other side of the trade. IWM didn’t return to the $196 level until Friday and even then IWM could maintain any action above or around this level.

Trade review upon closing the Trade:

 While I knew that things could turn, I was confident that I could edge out a profit. The first day I ended with a small profit but the second day most of the indices dropped and the Russell was no exception, however I kept the position open. I was looking for a price to sell but IWM ended up rallying later in the day and I ended with a $3 profit after being down close to fifty dollars.

 The next day I felt would be a recovery. When I opened the charts and looked at the action before the market opened, I knew IWM wasn’t coming back, and my best option would be to close the position at the lowest loss possible. At the open I was down $70 but I felt the market overreacted a bit, so I waited and put a stop loss limit order at a price that wasn’t too bad. Luckily, I was filled because IWM never recovered, and it would have been a rocky day. While I did lose money, it felt like I was in control, not of the stock or its movement but in control as far as how I felt and knowing what I could get for the position since I had to close.

Lesson: Don’t panic and don’t be in a rush to act but don’t hesitate to act when the time calls for action.

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