Dealing With a Trading Loss

As you may have read here Wednesday, I was long Bed, Bath & Beyond (BBBY) October 75/80 call spreads into the earnings number and it appears this will be a loser.

The original thesis for entering the trade was a very sizable buy on the September 75/77.5 call spread last week that perked up on my screen, among other technical reasons. Last week the chart and technicals started to improve as the stock pushed past $70, but it was Tuesday when it cracked on an analyst downgrade, which pushed the stock lower.

I had my concerns then, but went ahead and held onto the trade. I had also mentioned anecdotal evidence that could have been a guide, but I did preface by saying that idea could be dead wrong. And, I was wrong. Not the first time, nor for the last. I'm certainly not shy about pointing out my trading losses. They happen, I own them.

So, it's time to deal with a loss physically (holding the position) and mentally. I will exit the trade at some early point this morning as I see no reason to hold, add or repair. I have other positions to worry about and if this one is a clunker there is no use trying to make a bad situation worse. Could there be a new trade? Absolutely. But that is for another day. This trade was based on earnings moving the stock higher, it's not happening so it's time to move on. Is this devastating to me? No, because I didn't oversize the position. It was a normal-sized risk play.

While I'm not fond of taking a loss, I do understand the risk in playing in front of earnings and I accept the risk. The beauty of options is they define your risk when you are a buyer and you can only lose the premium that you purchased. In this case, the cost of 83 cents per spread done at the size I normally do will be probably be less than a 1.3% loss today. That's hardly devastating and completely recoverable on the next trade, which is why I will exit to focus on the NEXT trade.

Further, I want to get out of this trade well before expiration because I do not want to look at this trade in my accounts every single day, reminded of this loss. I like to wipe these off the board as soon as I possibly can and clear my mind completely.

Bob Lang is the founder and chief analyst for Explosive Options. He uses his unique blend of charting, technical analysis and option data to find the best ideas for subscribers to his service. Prior to this service, Bob started and managed two headline products for Bigtrends.com. These two services,Grandslam Options and Extreme Options became the most popular and most successful services in the company for years. In 2000, Bob started a hedge fund for high net-worth individuals and institutional clients. During the late 1990's he managed portfolios for a very large pension and 401K plan for Sunkist Growers, Inc.

Trading is NOT a game of perfect. We will all get some plays wrong, but it is how we manage those losses that defines the type of trader we are.