Day Trading & Forex Forum

Scenario # 2 (Bad outcome) XYZ $14.9

Bottom line = - 0.805

With the price being at $14.9, the sold 13c is now worth 1.90 and it needs to be repurchased for a much higher price than what was sold. Observe that it was sold for 0.70 cents and now needs to be bought back for 1.90. In this case, the loss is 1.20 per contract. However, the trade has gone sour, yet the max loss isn't 1.20 because of the fact that the 14 call which was bought for 0.505 and is now trading for 0.90; so once the 14 call is sold the profit of 0.395 is received and needs to be subtracted from the 1.20 loss (caused by the sale of the strike price of the 13 call). Therefore, the loss is actually - 0.805.

Scenario # 3 (Within the spread) XYZ $13.24

Bottom line = - 0.045

When all the calculations are done, the loss is basically less than a nickel per contract. The reason why that would be the case is the following. The breakeven point (BEP) was 13.195 and the price has closed at 13.24, when the bigger number is subtracted from the smaller one (the closing price minus the BEP) or 13.24 - 13.195, we get the loss of only 0.045; which is small. Now keep in mind that 1 contract controls 100 shares and the student has 100 contracts which is basically 10,000 shares. This means that the loss which seems small is in fact $450 plus the commissions. Once again be aware of the position sizing when trading options. Leverage is a two way street, it can work either for you or against you.

In conclusion, this trade is still open and it is in play until the expiry (Friday, 03/20/2009). Which way it's going to unfold remains to be seen, yet as of now we could learn from the student's pain. The saying goes: "Wise trader learns from his or her mistakes, but the wiser one also learns from the mistakes of the other traders." Please do not look down on other fellow traders; learn from their mistakes. Even if you lose money on the trade, do not lose the valuable lesson that the trade had. Go over your bad trades and learn from them. It is painful but it is worth it.

Good trading and again watch your position sizing.