Some lessons on an errant trade (or two) on Netflix ($NFLX) – January 26, 2024
This is Dan Fitzpatrick at StockMarketMentor.com. Netflix ( NASDAQ: NFLX ), I’m Captain Ahab and this stinking thing is my Moby-Dick.
I had put on an iron condor; way out of the money calls, way out of the money puts, where I’m assuming that the stock is going to stay within this range. Okay, well that didn’t happen. Right away, the first day it got blown out of the water. So okay, I’ll close that out. The puts expired, they were worthless, it’s all good.
This has gone up enough because it had a bad close relative to the high, so it’s probably going to settle down here. That was a big mistake on my part, true confession, I teach people that volatility squeezes, once they break out, a breakout from a volatility squeeze, typically goes a lot farther and a lot faster than you think it will.
It’s like this remarkable explosion of pent-up energy, I’ve taught that for years. It’s one of these deals where just because you teach it doesn’t mean that you always do it right. And this is the case for me, I’m just telling you this so that when you have a bad trade or something you know I feel your pain. It just sucks.
Then the next day, remember, I had taken a short position by short options when the stock was down here. So the next day it gaps up $7.00 and then continues to trade higher, it was up $17.00, so I got whacked on that deal too. I didn’t do anything and then today, I’m watching the stock, and then intraday it looked like it was turning around so I initiated another short call position.
Here’s the deal, I did close it out and I only took a little loss on this. But here’s the moral of that story, and I’m going to leave you with this. I have a lot of stuff to do during the day, I can’t just sit here and trade all day. Frankly, it’s been shown that the best traders, the most profitable traders, only spend a maximum of 4 hours in the market every day.
They don’t sit there all day long and bang stocks around. And so I try to do that as well, I don’t have a 4-hour thing, I’m just telling you, I don’t sit here and bang stocks around and always be staring at them on the 1-minute chart. That’s a silly thing to do and it’s not something that is going to make you money.
I went ahead, I initiated a short call position and it started making money right away. I’m going, “Finally, maybe I will get some money back.” But then I did this before I just went away and let the thing on its own. And no, I didn’t set a stop, it’s hard to set stops on options because the spreads are wider and they tend to oscillate more.
And no, it’s not like some market maker is gunning for your stops on your 10 call options. It doesn’t happen, nobody cares about us that much. What I did instead was, I placed an alert on the stock. My sense was, that if the stock goes above X, that means I have got to be looking at closing this position because I don’t expect it to do that.
Then I went about my way and it wasn’t but maybe 10 minutes later I heard, ring, which is my software telling me, you’ve got a problem. And so I went back back, sure enough, the stock was breaking out again and I closed the position right here. I had expected it to keep going down. And then ultimately, it did go down. No, I’m shorting it here, we’re doing good, yippee, we’re down $7.00. And then next thing I know, this thing starts breaking out, it was going down a little bit, and then it came up and I closed it out.
The point is this, there are 2 points to make. First of all, I put on the position but at least I had the prudence to say, “Okay, I’m not going to sit here and watch it all day because I’ll do something stupid and I have already done something stupid a couple of times on this stock, so I’m not going to watch it. But I am going to have my trading assistant, which is an alert system, watch it and tell me if something goes wrong.”
I got an alert, I went in, I looked at it, I pulled the trigger and I got out with a loss. It was a manageable loss because I don’t take big ones. As I did that I’m going, “Okay, well that is definitely the top.” When I close out a short position at a loss, that’s when the stock turns around and rolls over.
Well, that wasn’t the case here, the stock kept going. It ran up another & $7.00 or $8.00 until it finally pulled back, but not even to where it was before I had closed the position. So the moral of the story is this, if you set a stop, you set an alert and then you get out of the position, you’re out of the position, don’t second guess yourself.
You made a plan, you stuck with your plan, that’s the plan. You execute your plan and then you don’t think twice about it. What you should do is, you should look twice at it afterward to see if you were right or wrong. In this case, I feel good about that loss. If I had held the position and it was going against me, again, I’m short call options, that is a really bad place to be.
When you’ve got a position that’s going against you and you say, “Well, I know it’s going to pull back,” but it keeps going against you more and more. At some point, you are going to cry “Uncle.” And when you cry “Uncle” after you should have been out earlier, when you cry “Uncle,” that’s the top right there. And so, don’t put yourself in that position.
Have a drop-dead price, where if the stock hits here, boom. I’m out of there, that’s your price, it’s not emotional, it’s just trading. Because if you don’t do that, now you’re in the trade. The trade is going against you, you have no frame of reference other than the emotions that you’re feeling and the dollars that you’re losing.
At that point, your threshold for pain is going to dictate when you get out. Some people, typically, the biggest losers, have the highest threshold for pain that you have ever seen. But they always lose because that threshold for pain is finally reached right when the stock has gone to an extreme.
So don’t do that. Use your trading assistant. Set price alerts or just hard stops. But the point is, plan your exit before your entrance. That’s the thing, don’t go into a concert venue if you don’t know where the exits are.
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