I'm the editor of Cabot Options Trader , and for the first time in nearly two years, my subscribers may be looking at their first total loss on a recommendation. If you trade options as long as I have, you know that you are going to get the occasional extreme situation: The stock was riding the lower rail of an upward sloped trend channel and it was oversold based on the day Relative Strength Index.
The RSI measures a stock's recent performance against its past performance. A reading above 70 is considered overbought and a reading below 30 is considered oversold. The setup had seemed ideal, but the stock gapped sharply lower on Friday after a disappointing earnings announcement Thursday night. The gap lower created a situation where the June 36 Call was virtually worthless, so unless the stock can rally sharply between now and June 15 the expiration date , subscribers to Cabot Options Trader will suffer their first total loss on a recommendation.
That's the ugly part of options trading. Now let's get to the good part of options trading. Autodesk was my 75th Cabot Options Trader recommendation in almost two years. The best trade I ever made on an option was in December when I had calls on a stock and the company got a takeover bid. The key to surviving a complete loss on a trade is to use proper money management.
In the Cabot Guide to Options Trading , there are suggestions for proper money management. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc. Enter up to 25 symbols separated by commas or spaces in the text box below. These symbols will be available during your session for use on applicable pages.
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Proper money management is important no matter what you are investing in, but it is crucial when using an options buying strategy.
You can take a loss like the one we're holding on ADSK, but you live to trade another day. This article appears in: More from Cabot Heritage Corporation. Cabot Heritage Corporation Equity Research. Most Popular Highest Rated. Altran Group acquires Aricent and creates the View All Highest Rated. Research Brokers before you trade.