The Chicago Cubs Saga: How to Turn Losing into Winning

The Chicago Cubs had a legendary losing streak.It had been 108 years since they had won the World Series (1908), and a 71 year gap from the last time that they had even qualified for the Series itself (1945).

That all changed when they won the World Series in 2016.

During that 2016 game, they blew an eight-inning lead, but bounced back in the 10th (after a 17-minute rain delay). Mike Montgomery sealed the deal with a grounder to third base.

How do you turn losing into winning? How to you keep moving forward when you keep falling behind?

In trading it is extremely important to have a game plan for your losers, or else the losses will completely blow your portfolio out of the water.

A lot of times, you’ll fall behind in the 8th, and you have to know what to do to bounce back for the 10th.

I took off my GLD/QQQ trade for a profit of $51.03.

I was a little bit greedy with this trade, because it went to a $103 profit three days in. I had a goal of $108, because I received $216 in credit (I tend to shoot for 50% of max profit).

So I decided to wait for the extra $5, which resulted in the profits dropping down to $18, which obviously, was not what I wanted to happen.

I’ve been pretty lucky that none of my trades have dropped down into loss territory (yet – I can guarantee you that some will). I’ve just had less profits than I’ve preferred (which is always the issue, right?)

But it’s very important to have a plan for managing losers and to keep on trading. I got wiped out by a Brazilian ETF once, and that still is a scar on my portfolio. But imagine if the Cubs just decided to stop playing baseball – they never would have won the 2016  World Series!

The number of occurrences MATTERS. The Law of Large Numbers is our livelihood in trading.

So how do you manage the losses?

There are three key steps that you can follow (knowledge via tastytrade.com)

  1. Roll the untested side for a credit in the same expiration
  2. If it continues to move against you, roll the trade out and extend duration on the same strike
  3. Close if it goes past 2x the initial credit received

So breaking that down on the QQQ/GLD trade:

  1. Roll the untested side

QQQ: 161/164 call vertical (bearish) @ 158.83

  • Breakeven point = $162.54 [stay below]

GLD: 125/120 put vertical (bullish) @ 125.70

  • Breakeven point = $123.52 [stay above]

Let’s say that for the QQQ trade, my 161 short call was breached by the stock price. QQQ increased in value to $161, from the $158 price that I placed the trade at.

I could simply roll out the 164 call to 165 within the same expiration (May 18), and receive a credit of $0.45, which would increase the risk of the trade, but increase my breakeven point.

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For the GLD, let’s say that my 125 put was breached (I was pretty close to ATM when I placed the trade). I would roll the 120 put down.

However, for this trade, I am not getting much credit in either direction. Basically, if I roll it down to 119, I will get $0.01 in credit. If I roll it down to 118, I will get $0.03 in credit.

I am going to roll it down to 118, collect my $0.03. Unfortunately, this trade doesn’t have the premium I would need for it to be successful (that is because I traded it with lower IV than I should have).

2. Roll the trade out

If rolling the untested side still doesn’t work, you can just roll the entire trade out to a new expiration.

So my trade didn’t expire until May 18th of 2018.

For the QQQ trade, I had traded a call vertical. That means that I was betting that the QQQ’s would decrease in value. I traded the 161/164 spread when the QQQ was trading at $158 for a credit of $1.46. If the QQQ increased to greater than $162, that would be past my breakeven point, and I would start incurring losses.

If I still believed in the trade, I could have bought back the 161 call, sold my 164 call (to close out of it) and then sold a 161 call and bought a 164 call with a May 25th or later expiration.

For the GLD trade, I traded a put vertical. That means that I was betting that the GLD would increase in value. I traded the 125/120 put spread when GLD was trading at $125.70 for a credit of $1.46. If GLD decreased past $123.52, that would be my breakeven point, and I would start incurring losses.

If I still believed in the trade, I could have bought back the 125 put, and sold the 120 put, and then sold 125 and buy 120 with a May 25th expiration.

So basically, the same trade, but a little bit longer expiration time (more time to be right).

3. Close it if it goes past 2x initial credit received 

I received $1.46 in credit for both of the trades I placed.

If the QQQ or the GLD trade dropped to the point of a $2.92 loss, I would take the losses off at that point.

That’s definitely worse case scenario.

A lot of times, you can hang onto a trade and it will return back to profitable territory after a while. But you also have to know when to take your losses and not get your buying power completely wiped out by one trade.

Conclusion

So as I was finishing up this article, I realized that rolling for defined risk (credit spreads) really isn’t the most logical thing to do.

You end up having to pay for your trades, because it is hard to find credit because the trades are pretty risk averse. The credit I received in the QQQ trade would not have been enough to cover the cost of buying the call back.

Basically, we know what there is to lose in a defined risk trade. And we just have to deal with that. We can roll out into the future, but it just isn’t as common.

The next trade I will make will be a undefined risk trade (called a strangle!) and that is more appropriate for rolling for credit.

Also, with a smaller account (like mine) it’s a lot harder to roll and wait, and roll and wait. It just eats up the buying power of the portfolio.

It’s great to try and keep the dream alive, but it is hard to collect the credit needed to pay for the dream in the defined risk trades. When we roll into the future, we often reduce our probability of profit (because we are trading in-the-money).

BUT BUT BUT: it is still good to know the three key tenets of keeping your trade in-balance and managing the losers. After all, no one wants a 108 year dry spell in profits.

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Image via Susmer

 

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