October 26th, 2022

Need Help Repairing Losing Trades?

This year has been like no other.  Ok, fine.  There have been others like this, but it’s been a while since we’ve had trading like this. 


The 10-year T-note yield dropped yesterday to 4.108%, which helped spark a rally in tech stocks.  


Meanwhile, home prices and the housing market had been in a free fall marked by sky-high mortgage rates.  The only way to get buyers anywhere close to a home is to give them deep discounts.  Homebuilders are suffering from high commodity prices, worker shortages, and a lack of buyers.  And yet, homebuilder stocks rose due to the drop in bond yields. 


Oh, and did I mention that consumer confidence fell more than expected?  And yet, the market continues to rally!  


As traders, things don’t always need to follow the macro trends in order for us to find opportunities.  Here are the best relative performing sectors over 1 week and 1 month. 

repairing losing trades

Where do we go from here?

The S&P 500 (as represented here by the SPY), is in a solid uptrend.

repairing losing trades

This chart is reminiscent of the mid-July rally that propelled the market up 14%. That rally ended at the 200-day moving average. If we don’t stall out here at the 50-day, we have another 6.5% of potential rally left before we hit the 200-day moving average again.

With tech stocks in focus, let’s look at a potential earnings setup.

There are a few ways that you can get an expected move range for a stock depending on your broker’s platform, but one way that is available to all is to set up a strangle option.

Apple (AAPL) reports earnings on 10/27 after the market closes. To see the market’s expected price range of Apple, open the 28 OCT 22 option chain. I’m doing this after hours, but you can set this up as you’re reading this, but the strike prices may vary.

A strangle option involves the purchase of an at-the-money call and an at-the-money put.

AAPL closed at $152.34. The $152.50 call is going for $3.40 and the $152.50 put is going for $3.55. If we add these together, we get $6.95. That means the market is anticipating a move of about $7 in either direction in the next three days.

repairing losing trades

Well, if the market is only pricing in a $7 move and we know that after earnings are reported, volatility goes down, as do option prices, then we can sell options at higher prices now, and buy them back at lower prices after the earnings volatility crush.

You can sell options at the expected move range. In this example, I would sell the $160 call. Why? The current price is $152.50 and the market only expects Apple to move by $6.95 in either direction, so adding $6.95 to $152.50, you get $159.50. The next closest strike price that we can sell is $160. Make sense? If we sell the $160, we’re going to buy the $165 as protection.

Now, for the puts. We take $152.5 and subtract $6.95 and get $145.55. Let’s see if we can sell the $145 put and buy the $140 put for protection.

Again, after-hours prices here. I’m getting $1.15 credit per trade with a max risk of $3.85. For earnings trades, I prefer a 3:1 risk-to-reward ratio, meaning if the max gain for $1.15, I would want to see the max risk be $3.45 (1.15 * 3) or less.

repairing losing trades

Wait until after earnings are reported and look to close the trade at 50% of the max profit. You have the potential to gain from a drop in volatility, time decay, and if the price stays within the expected move range. Three ways to win!

Trading around earnings involves risk as stocks can have extreme moves, but I wanted to illustrate a couple of concepts.

I showed you how to get a stock’s expected move range at a certain date by setting up a strangle using purchased calls and puts. Then we set up an options trade using the expected move range, and we learned about a profit target for this earnings trade setup.

What we didn’t cover is trade repair. What happens when the trade goes against you?

Learning how to repair your trades is crucial to keeping your account from suffering losses, especially in a bear market.

Some of the best trade repair experts are Dave Durham and Chris Davis. Both of them taught a trade repair class at the Millionaire’s Trader Club and if you weren’t able to attend, you can still get your hands on the recordings for a low price. See Chris and Dave talk about trade repair, and Haley Bjorklund teaches a fantastic class about trading spreads.

And we even had a special guest speaker from Traders Accounting talk about how to structure your trading business. It’s all in two full days of presentations that have the potential to completely change your trading for the rest of this year and get you set up to absolutely crush it next year.

I’m giving you access to an exclusive discount on the recordings just for reading my article today!

If you have any questions, comments, or anything we can help with, reach us at any time.
Email: [email protected]
Phone: (866) 257-3008


 Jeff Wood

Editor, Filthy Rich Dirt Poor

Trader, Options Testing Lab

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