Last weeks trade anatomy got some pretty good feedback, and the most popular suggestion was to take a recent loss and show you how I closed out the trade.
I am going to show you a chart of GILD, but remember...the strategy and principles discussed are how I treat EVERY trade I take. This is a redundancy that I am forced to answer everyday, and hope it answers the questions for those that haven't been able to put this together quite yet.
GILD was a price pattern I highlighted a few weeks back. Here is a copy of the chart...
The triangle is outlined in red dotted lines. The pattern measured $5 points wide ($42-$47). My target was $39 and based on the breakdown of the triangle, I planned on closing out the trade if it closed back above $45 (solid black line - or - signal line).
On Feb 21st, about an hour before the close, it was apparent that GILD had broken support and would sustain this price move.
I bought Mar 42.50 puts.
Why? I expected the stock to move to $39. If that were to happen, the puts would have $3.50 of intrinsic value.
I paid $0.90 for them. Good risk/reward, huh?
It is also noteworthy that I positioned myself to lose the entire premium...but would surely get some back when/if my exit was triggered. Now that's the way to manage a potential loss!
A few days later, the stock sky-rocketed right up to my "signal line." Intra-day it had surpassed this value, but as I patiently waited towards the close, prices fell from their highs and rested right at my line. I smiled and knew I played this trade perfectly. I even giggled thinking about anyone who had sold at the highs when this stock was getting ready to smash back down toward its lows.
I was wrong.
The next day prices continued their surge of strength and I knew I would be taking a loss. Because I am a disciplined trader, I waited to close the position until the end of the trading day, after prices had committed to their early morning strength. At that point I sold my March 42.50's for .15 cents. I didn't lose the entire premium. I rock.
Moral of the story...have a plan, trade the plan, and always plan for a loss.
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