Tuesday was hard if you are a momentum trader. Wednesday is easy.
If you couldn't sleep last night, felt queasy during the trading day, threw things, rage bought, or became emotionally unhinged at the drop in momentum stocks, then you're probably a bit overexposed and need to trim a little into Wednesday morning's gap. Maybe you already did in the pre-market, which could be a good thing. We'll see how the morning plays out.
I know I've expressed this sentiment in the past, but it really is that important to remember: Panic selling can be the death of your portfolio.
I sold some holdings Tuesday that are going to gap higher Wednesday morning. They hit my stop, I honored my stop, and that's that. Sure, I may buy them back higher at some point, but it won't be now. The extra cash I freed up cut some overall risk to my portfolio. It permitted me the mental freedom and capacity to make some adjustments on open option trades, combination trades mostly, so that I could roll down some long legs. With options, I have defined risk and while one could argue the move was akin to averaging down (it is), there was also an intrinsic component gain to it.
Allow me to explain with an example.
Tortoise Acquisition (SNPR) is a name I used for the skip strike call butterfly combinations the other day. The initial trade was long the March $15 call, short 2x March $20 calls, and long 1x March $22.5 calls. When SNPR dropped on Tuesday, I rolled my $15 call down to the $10 strike by buying a March $10 call and selling the March $15 call for a cost of $2.80. At the time, SNPR shares traded at $13.65.
My goal here was to capture some of the time value from the $15 calls and provide some possible recovery in the position even if the stock remained flat. The intrinsic value from those moves was $365 against a cost of $280.
Of course, that $280 is an additional risk if SNPR falls, and it did close lower by the end of the day. Wednesday morning's pre-market gap is also gone. But the adjustment gives me some room for error. Additionally, I could look at rolling the other legs down to the $15 and $17.50 strikes, especially if SNPR rallies.
This is one of the things I like about the combinations trade. They provide some flexibility in a volatile mark. If we crater, then I look to roll down. If we rally, then I can look to roll back up or tighten the position. The biggest key, though, is the mental capacity to plan out the moves. If you're overcommitted in the market, it can be a more difficult task to complete.
So, if you found yourself not able to think through trades or adjustments Tuesday, then today is the day to fix your head.
