position repair
Hi Mark,
I own  POT May 195 calls, which I bought for $10.50(stock was at $197). POT has come down quite a bit in just 3 days and now my calls are worth mere $4.50. What can I do to
protect from further fall and/or what can I do to break even?

I believe POT will be up in next few weeks.

Thank you for your help.


Hello David,

First, a bit of my philosophy and approach to trading (stocks or options).  I don't mean to preach, but I think too many investors have blind spots that result in their losing money - for no reason.

Trying to 'break-even' is a psychological barrier to the success.  Some trades are simply unprofitable and that's all there is to it.  Sometimes it's necessary to take the loss, preserve what's left of the money invested in the trade, and move on.  That does not seem to be appropriate in this situation because you believe your stock is going to move higher and you apparently want to place a wager on that happening.  Your goal is to you find the best way to do that.  In this case, is owning the May 195 call your best choice?  I don't claim to know the answer, but if you were to place the bet today, is that the call you would buy?  If yes, they do nothing.  If 'no' then sell that call and replace it with the call you want to own today.  Or perhaps you may prefer an alternative bullish play - such as collecting a cash credit by selling put spreads.  Do not allow yourself to become locked into a trade just because you made the trade at some point in the past (and here's the crit
ical part) and feel you cannot change your mind and take a loss.

I strongly believe that the price you paid to initiate a position is 100% irrelevant.  That's worth repeating because too few traders grasp that point.  Breaking-even is NOT your gaol.  Your goal should be to find the best way to make money from this point forward.  You are apparently still bullish.  Do you trust that opinion enough to bet on it?  If yes, then go ahead and own some calls or sell some put spreads. 

There are many ways for investors to use options, but in my opinion, buying calls or puts - one method for wagering on which way a stock is going to move over the short term - is an almost impossible path to profit over the long-term.  The odds of success are stacked against you. However, if willing to accept a limit on potential gains, the odds of success are much better when you sell out of the money put spreads.  I don't know this stock and am NOT offering advice, but if you were to sell the May 175 puts and buy the May 170 puts (or other strike prices that suit you), you could collect at least $100 per spread.  Sure, it's a limited gain, but there is a good chance of making that gain.  And the other benefit is that your maximum loss is $400 per spread.  If that idea appeals to you, you must avoid one big trap:  Don't believe this position is so safe that you can afford to sell lots of spreads.  Recognize the possibility of loss exists and sell an appropriate number of sp

Here is one further idea and is the traditional method investors use to 'repair' a losing trade.  I don't know how many calls you own, but consider this:  Buy half as many May 190 calls and sell all your long 195 calls.  You can collect a cash credit for doing this trade.  That helps because it brings in cash and reduces your maximum loss for the trade.  You now own half as many calls, but with a better strike price.  If the stock rallies, you will do well.  In fact, if you hold this position through expiration (another practice that call buyers must learn to avoid) you will make more money owning this this call than twice as many 195 calls, unless the stock rallies beyond 200.  But, let's not get greedy.  You have a losing position and want to own a position with a better chance of making money from today.  Buying one 190 call and selling two 195 calls, and taking in cash, is one good method for accomplishing that goal.

Bottom line, you can:
  • Sell you rcalls and buy half as many May 190 calls
  • Hold and hope for the best
  • Sell the May 195 call and replace it with the same quantity of a different call
  • Sell the May 195 call and replace it by selling put spreads
  • Hold and sell some put spreads
  • Give up and accept the loss
Mark D. Wolfinger
The Rookie's Guide to Options:
The Beginner's Handbook of Trading Equity Options