Struggling in The Trade
In the movie Fight Club, Tyler Durden hypothesized that the oxygen masks on planes were there to help make the passengers high during a crash scenario so they’d dye peacefully. Perhaps oxygen masks dropping out of the ceiling of your trading office could be a bad sign for where your trades are going.
If you were in the Russell 2000 on Wednesday you might have been concerned for your strikes. We had pegged the 1170/1160 as a reasonably secure place to be for a credit spread that would expire this coming Friday, Aug 14th. As price drove downwards the loss on our trade became substantial. The premium for this trade would have been somewhere around 12 cents per contract. Minus those damn commissions and fees, that’d give you the seller a profit of $12 per contract. If you went with 10 contracts, then you’d have $120 of profit.
As Wednesday went by you could have watched, panicked, sold, or have been completely unaware. Some of us have lives! If you were watching, you’d have noticed the price open at around 1200 correlating to a loss in your position somewhere in the hundreds. Then it only got worse…
From the chart below:
1. Loss ~$200-$400
2. Loss ~$2000-$2200
3. Loss ~$400-$500
4. Profit ~$200-$300
The time erosion across the day and subsequent week leads to the options value decreasing. As price increases the loss decreases. The two combined for a very nice ending of the day. It’s difficult to watch as such a dramatic swing in your accounts value occurs. You made $120 dollars but may be losing over $2000! WHAT IF IT KEEPS GOING DOWN!!!???? Well, you could lose it all. Of course, no loses occur if you don’t buy the trade back.
The phrase “collecting nickels in front of a steam roller” comes from trades like these. In a credit spread one really has to be correct in their assumptions a vast majority of the times they trade. If they desire to be profitable that is.
* Charts from Trade Architect™
Disclaimer: The information presented does not consider your personal investment objectives and should not be taken as a recommendation. Further, it shall not be construed as an offer to sell or a solicitation to buy any security mentioned. The risk of loss in any stock, option, or futures trade can be substantial. Consider all relevant risk factors before trading.