Yesterday, I bought 8/5/2022 $8 calls on Riot Blockchain Inc. (NASDAQ: RIOT) but got stopped out at breakeven right before the close.
Today, RIOT stock was up as much as 6% while the calls I got stopped were up as much as 90%.
Is this frustrating to watch? Of course. I’d be lying if I said it wasn’t…
But remember, hindsight is 20/20.
While my gut conviction was ultimately proven right, I didn’t know what the outcome would be yesterday. Anything could’ve happened today.
I’d always rather sell too early than get stuck holding a big bag of weekly options.
$127k in just 24 hours?! 😳
Did you catch the Shadow Trades Summit with Tim Sykes and Mark Croock?
Mark pulled back the curtain on his shadow trades strategy…
Detailing step by step how he was able to make $127,000 in just 24 hours, during the middle of a market crash!
If RIOT had gone the other way and traded below $8 today, my contracts probably would’ve been down 50-80%.
Now you may be wondering … Why should YOU be paying attention to this?
Because if you’ve been trading options for more than five minutes, I bet you’ve been in a similar situation before…
And holding a losing options trade — especially one you haven’t sized to perfection — could potentially blow up your entire account.
Prevent Your Contracts from Going to Zero
Similar to penny stocks, holding onto a losing options trade can kill your account.
But there’s a key difference between stocks and options … it’s more likely that an options contract will go to $0.
Think about it. For a stock to go to $0, the company has to go bankrupt.
But unlike stocks, options contracts are depreciating assets from the moment they’re written…
In fact, the vast majority of contracts expire worthless by their expiration date.
This makes it very simple … If you’re not willing to cut a loser, you’re probably gonna lose it all.
The Trouble with Time Decay
Since options combine the idea of time and price, there’s more to consider here than there is when you’re trading stocks.
Think about time decay, which means the closer your option gets to its expiration date, the faster the price of the option will fall when it moves against you.
This means that one small move in the wrong direction can lead to a nasty loss if you’re not careful.
Growing A Small Trading Account? Check this Out
When multi-millionaire trader Mark Croock first started trading, he was an overworked and underpaid accountant…
So he knows what it’s like to start small while wanting to massively grow your wealth as quickly as possible.
That’s why he just recorded a step-by-step training that reveals what he believes is the best options trading method for someone trading with a small account.
Bottom line: You’ve gotta be quick when cutting losses as an options trader.
And all of these factors influenced my trading around RIOT this week…
How I’ve Avoided Big Drawdowns
As someone who regularly trades hyper-volatile weekly options, I need to be extremely diligent about cutting losses quickly.
After all, it’s Tim Sykes’ #1 rule for a reason. If you don’t cut your losers, you’re setting yourself up for failure.
Aside from Sykes, few understand how to teach the art of trading better than my buddy Tim Bohen. And today, Bohen’s got a new strategy he’s ready to reveal that’s centered around earnings season…
I’ve spent 10+ years as a professional trader by minimizing my risk and (mostly) eliminating huge losses from my trading.
Just take a look at my profit chart. There’s a reason it has no major drawdowns … I’m obsessive about cutting losing positions when they begin to move against me.
One way I guarantee I’ll never take a crippling loss is by setting stop losses.
If you’re newer to the options market, you may not even realize that you can use stop losses on options just like you can with stocks.
I’ll set a stop loss at the price I bought the contracts (or slightly above that price).
This ensures that I won’t lose money on the position. In the worst-case scenario, I break even, which is what happened yesterday with my RIOT calls.
Unfortunately, RIOT traded as much as 6% higher today, which could’ve delivered me 80%+ profits.
But this doesn’t change anything because I didn’t know that yesterday.
Protecting your current account value is far more important than increasing it exponentially. Never forget this.
I’m not gonna sugarcoat it … options trading is tough.
But managing the risk involved is a lot easier if you do one thing — cut your losses immediately.
Following the steps I’ve laid out today can potentially help insulate your account from big drawdowns. The rest is up to you.