Options Stop Loss Strategy

Options Stop Loss Strategy

January 28, 2014 / Emilu Bailes

My investing began in 1990 when I received a Welcome book from Investor’s Business Daily. I was lured toward growth-stock investing by William J. O’Neil.
During that decade, when I was actively working outside of the home, I made every effort to follow the Can Slim Rules and Guidelines. By the time the Bear
Market hit in 2000, I had lost many small amounts of capital and felt that I would die from a thousand cuts. My mind was clear that options were right for
me, as well as learning how to adjust my positions. There remained a big question about whether to use Stop Losses or not. During my education process on
Options’ Behavior I became confident toward not using any SLs.

I’m an active subscriber to the tools of IBD, including eIBD, Investors.com, LeaderBoard, and MarketSmith. Additionally, I periodically attend IBD
Education courses to learn more about the style of investing/trading even though I add my style of options to the long stock positions.

I enjoy including the leading stocks on my watch list. In fact, IBD offers a good number of equities to track and follow through the IBD-50, the
Big-Cap-20, and LeaderBoard. Additionally, on Investors.com there is a link to follow those that are either being bought or sold with heavy volume. Volume
is a strong key towards success in investing. Price and volume have become my most important technical indicators.

Since my graduation from OptionsANIMAL.com I became relaxed by NOT using stop losses and simply adjusting the trading position as they needed it. Having
the knowledge during the Bear Market of 2008 I held my stock and worked the options around it. My choices were to close my long stock position more than
50% below the price where it was bought or trade options around the long position. Five months later I had the stock called away from me at $20.00 per
share. Although I bought it at a price over $40.00 per share in August, I still took a profit. I did not use stop losses.

Last year I observed my first High-Tight-Flag base structure for many years of investing/trading. Tesla was the equity. When I did my full due diligence on
the stock, I concluded that it was too weak fundamentally for me to invest. There was no profit in its earnings, the cash flow was poor, the ROE was not
applicable, the debt was huge, and my opinion was that the alternate-energy automobile was too expensive and unproven. I had no interest in placing my
money into Tesla Auto. Before long another equity was labeled with High-Tight-Flag base. I went to work to examine the fundamentals on NQ Mobile. The
earnings were strong, the ROE was good, there was no debt reported, and the cash flow was fair. I began by doing a few swing-trades on NQ for a nice
profit. By the end of September I decided to invest in the long stock and add to it when appropriate. Within weeks I had accumulated more long stock, but
avoided the options because the behavior of the base structure indicated that it had further price increases to make. Even when I looked into adding long
puts for my protection, I saw that the implied volatility was way too high, hinting that I could become a victim of IV-Crush.

Towards the end of October a fund blasted the fundamentals of NQ Mobile and within ninety minutes the price dropped a huge amount (more than 62% from the
high during that day to the low.) I had no options on NQ and by the time I saw it, it had already fallen from the high point. What should I do? Sell it and
take the loss? Or work with the options to recapture my capital? There was a powerful lesson for me to learn. Perhaps I should have taken the loss, but I’m
still holding the long NQ stock. I’ve been reading all kinds of news about it for these months. I traded short options against the long stock without a big
concern that the stock would be taken from me in order to fulfill my short options obligation.

What’s the big lesson?

If you are examining a leading stock and find that the IV is over 100% for the options, avoid including it on your watch list, or buy it only if you are
willing to place a stop loss on it!

Emilu Bailes
OptionsANIMAL Instructor

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