Lessons Learned From a Losing Trade (and 26 Wins!)

Of course, it always hurts to take a loss, especially of this size. But losses are an inevitable part of trading… and much easier to take when you have plenty of wins to balance them out.

We’ve closed 27 trades so far in 2024, and ROKU was our first loser. That gives us a win rate of 96% for the year, and we’ve booked a total of $1,911 in net cash. The fact that we have so few losing trades is due in part to employing active recovery strategies to mitigate losses. 

For instance, we’ve found success with our recovery trade on The Trade Desk (TTD), which we closed in mid-February. By staying calm and selling calls once we saw shares move higher for a few consecutive days, we managed to walk away with a nice profit on a trade that had been deep underwater a month earlier.

Part of that strategy is knowing when it’s worth continuing on with a trade and when it’s time to walk away and accept a loss. As it happens, Roku wasn’t the only recovery trade Options Income Weekly members closed last week. And the story of these two trades is a great illustration of how successful options trading requires a balance of calculated risk-taking and active position management.

A Tale of 2 Recovery Trades

We’ll start with Roku. 

We entered the position in late January, selling a cash-secured put that expired on March 1, which happened to be after the company was set to report Q4 earnings in mid-February. But we were comfortable holding ROKU through earnings, as our put strike was 23% out of the money.  

The company beat earnings and revenue estimates when it reported, while giving strong 2024 guidance, yet the stock got hammered, falling 24% in a single day. 

This seemed like a gross overreaction, and we rolled the put several times in hopes that shares would recover. But the stock continued to drop. Investors seemed concerned with competition in the streaming market from the likes of Netflix (NFLX), Alphabet (GOOGL) and Amazon (AMZN), as well as stiff competition in the connected TV (CTV) advertising market. A handful of analyst downgrades didn’t help sentiment. 

With little hope of ROKU regaining bullish momentum in the near future, we made the decision to close our recovery position, book the loss and redeploy the capital this trade was tying up.

The story of our Devon Energy (DVN) recovery trade has a happier ending.

We entered DVN in early September when the stock was trading around $53 a share. The position immediately went against us, and we were assigned shares later that month at $51. Over the next few months, DVN would fall as much as 24%, bottoming out near $40 a share in early February. 

But we rode out the downturn, selling calls for income and collecting two dividend payouts. With the cash we generated, we were able to lower our cost basis on shares to $45.20. So, when our shares were called away on Friday at $46, we booked a profit of $80 per contract.

While we still like DVN (which is why we continued to trade it as a recovery position), we see better opportunities in the energy sector for income traders, such as our recent trade in Occidental Petroleum (OXY).

To sum up, we closed two recovery trades last week with two very different outcomes. And while we took our first loss of the year in the Options Income Weekly program, we have 26 winners to take the sting out of that loss.

Losses are inevitable, but by applying effective risk management strategies, we can minimize their impact. The key lies in striking a balance between calculated risk-taking, active position management, and the constant pursuit of new income-generating opportunities. By embracing this approach, we can navigate the inevitable ups and downs of the market and achieve our overall income goals.