APR
24
2007

Murphys Law and the Bittersweet Taste of a Trading Debacle


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I wanted to relate to you a small trading debacle I managed to get myself into last week. See how I handled it, and what I did to further minimize the chance of it happening again. Learn why you should never double down on a trading mistake, and the bittersweet taste of being both right and wrong at the same time…


I wanted to relate to you a small trading debacle I managed to get myself into on Thursday evening. Last week, I had to close out a covered call position in NYSE:TXI that had gone in the money. I was sitting on a nice long-term profit in the underlying stock, so it would be in my best interest to close out the short-term option position for a loss and maximize the long-term gain as opposed to the other way around. On Wednesday afternoon, with TXI breaking down to approach $72 a share, I watched the offer on the April 65 Calls closely, which was currently at $7.60. Even with TXI breaking lower, the option’s offer didn’t follow. Soon after TXI bounced, and I grabbed 20 contracts and covered just as the offer quickly raised back to over $8/contract. The toughest part of dealing with less liquid options are the spread, and this particular option on average had a 50 cent spread at any given time. With no time value left in the option, the price was entirely based on TXI’s current price. However, the spread would lean in favor of the next anticipated move, and would move away quickly on any reversal. As it turns out, I did very well as I came quite close to the low of the day. Next step would be to sell the stock and lock in the long-term gain. Based on my analysis I was expecting a bounce in TXI, likely to occur over next day or so. As my luck would have it, overnight China’s GDP came out and caused another market panic on fears of rising interest rates in China. Just another B.S. story, because not only would it take an actual raise, but likely several of them to have any real effect on the commodity markets. Just look at how the same scenario has recently unfolded in the U.S.

In the meantime, I believe I was probably still correct with my analysis, although I’d have to sit through a bit of early morning pain. TXI touched a low of $71.02 off the opening bell and immediately went straight up from there. My biggest mistake at this point was not buying more for a short run. I figured I didn’t want to complicate matters and I’d focus on the main purpose of maximizing the long-term gain I already held. TXI recovered about 4% that day on what was likely partially driven by a short squeeze facilitated even further by the morning’s panicky price action. Now here’s the clincher – where Murphy’s law kicked in. If you look at TXI’s chart for Thursday, you’ll notice TXI dropped down to about $73.50 a share, which actually occurred after the closing bell. That was me – by accident! Despite all the bells, whistles, and voice alerts I have in tymoraPRO to make sure I’m trading the right size and stock, I managed to sell 200 shares of TXI instead of NASD:EBAY (in play after the market closed due to its earnings release). I guess I should feel lucky I was filled ONLY a dollar below the close and for ONLY 200 shares. When trades like this occur, unless it was perhaps $10 points lower, you’re usually pretty much stuck with it – without recourse. That’s also why it’s better to work with smaller individual orders – in case you do make a stupid order entry mistake. [A few other notes: TXI is a short pilot list stock, which means it can be shorted on a downtick. Also, a print for about 30T shares showed up about a point below the close from the NASD exchange. Always interesting how a bunch of factors combine to facilitate "Murphy's Law".]

Worst of all, I expected TXI to pop the next morning in a continuation of the day’s move. Talk about bittersweet success – the ultimate paradox! I want TXI to go down, no I want TXI to go up! On one hand I was thrilled for the several thousand shares I had to sell the next day. However, I was kicking myself for my stupidity (in my other trading account) over how much a momentary loss of focus would cost me the next morning. Overnight, I even added another protective feature into tymoraPRO that would require me to first acknowledge and accept any order entered pre or post-market in a new stock. That should all but assure I couldn’t repeat this mistake again. Tell me how many platforms support traders like that!

When mistakes like this are made, it’s best just to close out as quickly as possible and take the loss. I couldn’t even do that here, since there were literally NO offers in sight at any price – even in pre-market trading the next morning. In fact a few higher bids showed up instead – where were they when I slipped up?! As I expected, TXI shot up off the open and hit as high as $76.59 before falling back. At its worst this “small” mistake showed a paper loss of nearly $1,000 dollars. Not bad for a slip-up, ay?! When all was said and done, I ended up covering a good chunk of the larger position around the middle of that for a nice hefty long-term gain, and I cut down the stupid loss to less than half of that just by waiting for TXI to stabilize after the move. I DIDN’T TRY TO TRADE MY WAY OUT OF IT. And here’s a big lesson. Most trading debacles start out just like this. That bad TXI mistake may eventually go back to break-even, but I wouldn’t be starting out with a clear cut plan for such a trade. In fact, had I tried adding to the short position expecting a complete breakdown, I would have been even worst off as TXI went on to make another new high later that day, and even closed near its highs. [Note: The next day TXI nearly touched $80 after breaking its downward trendline, so imagine the pain I would have had to endure over what began as a small mistake!]

What I can tell you is after dealing with the mistake as soon as possible, clearing my mind and refocusing myself, I made back those losses pretty quickly and by the end of the day, it’s another past learning experience that I can put behind me and share with all of you, so perhaps someone else can learn from it as well. I’m sure tymoraPRO users will also be very pleased to know that my faux-pas has enabled me to create one more safety feature for all of us to use to make sure that others won’t be likely to make the same type of mistake again.

 by on Apr 24, 2007, 12:00am
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