How Investing Drives Us Crazy: Lessons From a Trade
Investing can be incredibly frustrating, even when you're doing things "by the book." I'm going to walk you through a recent trade I made using real money, pointing out all the things I did well. Unfortunately, even though I did everything "right," I still lost money on this trade. Let's take a look at what happened. (See also: 7 Common Investing Mistakes)
Starting Out: It's All About the Sentiment
I was convinced the shares of a certain tech company were headed lower. And since I love tech, I had read up on them and knew what was going on. I felt I could make a very strong case to put my money where my mouth was.
So I bought what’s called a bear-put spread. I bought five September puts and sold five September puts at a lower strike. It cost me $275, and it would make me $225 if the stock stayed under $30. At the time, the stock was around $31.
Monitoring Your Trade: Pay Attention
Right after I made the trade, things started to happen in my favor. By August 8, it was all the way down to $25 — good job, Carlos!
Then it climbed up past $35...and I got a little anxious.
And then came the curve ball — a huge tech company bought another big one, and rumors started circulating that the stock I was trading might get bought up as well, which I definitely didn’t see coming.
If you have money on a company, pay attention to every piece of news, even if it isn't directly about that company. Read everything.
If Things Change, Make a Move
This current situation was no longer the situation that existed when I put the trade on. Because of the rumor, my original sentiment no longer applied. At that point, I had two options: stick my head in the sand and do nothing, or get out of the trade.
So I sold out of my trade for a total loss of $70, including commissions. I felt bad losing money, but I was also proud of myself for being proactive and doing “the right thing.” I felt like I was practicing sound risk management, which made me feel like some investing hot-shot who knew what he was doing.
If the landscape changes, get out while you can. Don't let greed keep you hanging on to a trade that's gotten out of hand.
I was feeling great about my "risk management" skills right up until expiration came around. With the stock at $34 the day before my trade was going to end, I almost stopped paying attention.
But earnings the day before had been a catastrophe and the stock plummeted all the way down to...$28. I would’ve made a profit of $225 if I would’ve held on to the trade. Instead, I was down $70.
Here’s a P&L Chart courtesy of OptionsHouse that shows what my trade did from one day to the next:
It went from being down $275 to making $225 — all in one day! Talk about being filled with regret...
Even when you’re right and do the “responsible” thing, trades can turn against you. All you can do is learn your lesson and move on to the next trade.
Disclaimer: I am an employee of OptionsHouse. LLC and the views and opinions expressed herein are my own and not those of OptionsHouse, LLC or any of its affiliated companies. This post is meant as an informational post and should not be construed as investment advice or a recommendation of any particular security or investment strategy. Any similarities between this hypothetical investment scenario and any actual investment results are unintended and purely coincidental.
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