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How To Manage A Trade That's In Trouble - My Options Trade On TQQQ

Dec. 08, 2020 1:51 PM ETTQQQ
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I’m Markus Heitkoetter and I’ve been an active trader for over 20 years. I often see people who start trading and expect their accounts to explode, based on promises and hype they see in ads and e-mails. They start trading and realize it doesn’t work this way.

The purpose of these articles is to show you the trading strategies and tools that I personally use to trade my own account so that you can grow your own account systematically. Real money…real trades.

So you have a trading strategy. You have your trading tools ready to go at your fingertips. You trade with a paper trading account to make sure your trading strategy is solid. You’re finally ready to start making real trades.

You start trading and everything goes according to plan until a trade comes along when it doesn’t. Now you find yourself in a trade that is in trouble.

How do you handle this? Well, the first thing you need to remember to do is to keep your cool. One of the most important aspects of trading is being in the right mindset.

This is important because trades will go against you from time to time. It’s just the nature of the business, and you can’t lose your cool when this happens.

If you aren’t in the proper mindset when a trade goes against you, then you will not be properly equipped to manage it, and I have some good news… there IS a way to manage a trade that’s in trouble.

I was in such a trade recently, and I will show you how I handled it.

How I Managed A Trade In Trouble Step-By-Step

I was recently in a trade with (TQQQ). I opened up my trading software and say I was at -$3,500 open P&L with this trade.

1) The first thing that I did is I sold a put with 150 strike price and I received $66 in premium.

2) However, what happened is with this particular trade was I got assigned. So I had to buy 100 shares of (TQQQ) for $150 each.

At this time (TQQQ) was trading at $116 which was not good because I bought it at $150.

However, as soon as I was assigned these shares, I starting selling calls against these shares. This is how The Wheel Strategy works.

You first sell puts and collect premium. If & when you get assigned, you then sell covered calls against these shares at a higher strike price to try and get “called away” to sell the shares at a profit, and you keep doing this while collecting premium until you do get called away.

Now understand, you will get assigned trading The Wheel Strategy, but trust me this is a good thing.

3) So I then sold a call with a strike price of 155 for $2.10. Now with this call, I could have actually been “called away” on this trade and sold the shares at a profit, but I felt that I could just instead hold onto the shares to possibly sell them for a higher profit.

So I just kept the premium of $210 ($2.10 multiplied by 100 shares) I collected on this, and then the next day I bought the call back for $0.37.

So $2.10 I collected in premium minus $0.37 that I paid to buy the call back, comes to $1.73 which means I made $173 in premium. These are realized profits.

4) Next, I sold another call, this time with a strike price of 150 for $0.45 and I also bought it back for $0.05 2 days later to keep from being called away to sell them later at a higher profit, but collected more premium.

So this means if you take the $0.45 I collected and subtract the $0.05 I paid to buy the call back this comes to $0.40 which means I made another $40.

If you add up all the premium collected so far ($66, $173, &$40) I have made a total realized profit of $279 so far over the last 15 days, which is not too shabby.

5) The price of (TQQQ) started plummeting, so instead of selling another call, I instead, decided to sell two puts with a strike price of 100 for $1.14. I chose to sell two, based on what my account size allowed if I were to get assigned again.

So with each share yielding me $1.14 in premium a share, this comes to $114 each contract, and since I sold two contracts, I collected $228 in premium total ($507 overall).

What Happens If You Get Assigned again?

Now you might be thinking selling puts was a bad idea. I mean, what happens if (TQQQ) is below $100 by expiration, and I have to buy 200 more shares of (TQQQ) ?

It would actually be really, really awesome if this would happen. There are actually two scenarios of what could happen and they are both awesome.

In the first possible scenario, (TQQQ) stays above $100 by expiration, which is in one week. In this case, I keep the $228 and my total profit from this trade goes up to $507.

Now scenario two, and this is the one that would make some people nervous, is if (TQQQ) drops below $100 on expiration. In this case, I have to buy another 200 shares for $100.

Here is why this would be a good thing, and why buying more puts was a smart move, but I’ll let you be the judge.

If scenario number two happens, I would have bought 100 shares for $150 and I would have bought another 200 shares for $100.

So this means that right now my cost basis is lowered when you average the cost of the total price I would have paid for all 300 shares.

So I did buy 100 shares times 150, plus 200 times 100, and I’m dividing all of this by 300 so that I get my average price per share. This means $116.60 is the average price I paid per share.

So this means as soon as (TQQQ) moves back up to $116 I break even, and if it moves above $166 I’m making money. So $116.66 is my new magic level instead of $150.

Now look at this, is it more likely that over the next few weeks (TQQQ) goes above $116.66 or $150? $116 right?

So by doing this, if scenario one happens, okay, great, I just keep racking up premium, and that’s fine. If scenario two happens even better, I’m lowering my cost basis here.

If the new average price per share is $116.66 per share, instead of what it actually was which was $150, it is easier to get back into the green.


This is how I managed this trade. At first glance, it simply looked like it was in trouble, but in reality, all you need to do is keep collecting premium, and when you can, lower your average price per share. Both of these things will lower your cost basis, making it easier to get back into the green when a trade is going against you.

This is the beauty of The Wheel Strategy, even when a trade is going against you the strategy is still going according to plan.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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