If you’re in the game of trading (and investing), you will inevitably experience losses. Managing those losses is important for future success, as it allows you to move forward. Options 101 says you can approach it in two ways: either sell for a loss or try to turn a losing trade into a winner. Let’s take a look at each strategy.
Sell for a loss
At times, it makes sense to book the loss and move on. It’s a painstaking exercise, but allows you to clear the deck and your mind. I have paid my broker to sell a loser just so I don’t have to look at it every day.
From a psychological perspective, selling a losing trade is a win. You no longer have to agonize over how much money you just lost or how much it has to gain so you can break even. When the odds are extremely low, hope enters the equation. Hope is not a trading strategy.
Turn a losing trade around
If the losing trade is not a big loss, study the technicals, price action and volume. Will the stock move in your direction soon? At what point can you break even or even create a winner?
It’s not easy to repair losing trades, but it is not impossible. Here’s how I approach it.
When I find myself with a long call that is turning into a loss but that I believe can still turn around, I’ll immediately look at taking more time. This strategy requires more capital from the same strike, so I may take the strike up higher and add a layer of protection by selling an upside call. Thus I’ve created a vertical spread. The net effect is often be less capital expended, more time to let the trade work and the potential to roll the short strike more than once. (This can work with puts as well.)
If a long call is getting hammered because the stock is tanking, I might sell put spreads. My strategy here is to capture enough premium to cover the long trading loss while taking more time. Let’s say I bought calls at $3 and now they’re selling at $1.85. I would look to sell put spreads for at least $3. If the stock rebounds, I’ll collect on both ends. (Keep in mind that a put spread sale requires posting margin.)
Occasional losing trades are part of the game. How you respond sends a strong signal about whether you can stay in the game.
