February 26, 2008
HBC -18%
Another big important lesson as we closed out our HSBC trade. When you do not have an exit strategy, you have nothing! Capital is at risk! Our original intent when placing the trade was to let the March options expire and make our return. We did not take into account that earnings would be during this period, which is also a very volatile period. Here are some other risks that occurred:
1.Broke topside resistance. Broke the 50 day and was testing the 30 day moving averages.
2.This is a credit spread, so we had margin involved. This makes the trade that much more riskier when it goes against you.
3.As stated earlier, earnings are due soon, which can cause IV to go up and cause much more fluctuations in price.
4.Existing trade could not be converted into another trade to mitigate our risk.
Some additional notes:
1.We did size for max loss and bought limited contracts, so that did not create any additional surprise or risk on our bottom line.
2.We placed our first bear call spread and now we understand the basics of when to place a trade like this.
3.Have a plan. How will your investors/risk management firm react when you say, “I don’t know” as to how you are mitigating risk?
Loss = .60 Credit – 1.40 Debit to Close = .80 / (5-.60) = -18.1%
Thanks to Mojo and Gekkotrader for the feedback!
