How to Recover From a Bad Trade (Yes, My MRNA 36.50 PUTS will be assigned)

Fortunately, I did close my 35.50's for a good gain which already offsets the unrealized-loss I'll have in MRNA come Monday morning.  MRNA still has good volatility so I will be selling covered calls Monday as well, or maybe wait for a brief bounce to capture more premium.  MRNA has weekly calls so I should recover quickly.  

However, there are some significant catalysts that could prove to be strong headwinds.  States trying to legislate against mRNA vaccines, Earning on the 14th and the RFK Jr confirmation.  In the end this will probably be a net-0 or slight loss but proves as good reminder to look at the bigger picture and the macro environment.  Yes, one of my rules, but sometimes I get G-Locked as well.

Recovering from a significant trading loss can be a daunting challenge, but options strategies, particularly covered calls, offer a potential path to recoup losses and rebuild your portfolio. Let us explore how this approach can help traders bounce back from setbacks.

Understanding Covered Calls

A covered call is an options strategy where an investor owns shares of a stock and sells call options against those shares1. This approach can generate income through option premiums while potentially reducing the overall risk of the position. Here is how it works:

1. You own 100 shares of stock.
2. You sell a call option on those shares, giving the buyer the right to purchase your shares at a specific price (strike price) before a certain date (expiration)
3. You collect a premium for selling this option.

Using Covered Calls to Recover Losses

When you've experienced a loss in a stock position, covered calls can be an effective recovery strategy:

1. Generate Income: By selling call options against your existing shares, you can collect premiums that offset some of your losses3.
2. Lower Your Break-Even Point: The premiums you receive effectively reduce your cost basis in the stock, lowering the price at which you break even6.
3. Limit Further Downside: While covered calls don't protect against all downside risk, the premium received does provide a small buffer against further losses1.

Implementing the Strategy

To use covered calls for recovery:

1. Analyze Your Position: Determine the magnitude of your unrealized loss. For example, if you bought a stock at $40 and it's now at $30, your paper loss is $10 per share6.
2. Choose Your Strike Price: Select a strike price that balances potential upside with premium income. A common approach is to choose a strike price above the current stock price by half of your loss6.
3. Select an Expiration Date: Longer-dated options typically offer higher premiums but limit your flexibility. Choose an expiration that aligns with your recovery timeline.
4. Execute the Trade: Sell one call option contract for every 100 shares you own.

Example Scenario

Let's say you bought 100 shares of XYZ stock at $50, but it's now trading at $40. Your unrealized loss is $1,000. You could:

1. Sell a covered call with a $45 strike price (halfway between your purchase price and current price)
2. Collect a premium of, say, $2 per share ($200 total)
3. If the stock rises above $45 by expiration, your shares will be called away, but you'll have recovered $700 from your loss ($500 from stock appreciation + $200 from the premium)
4. If the stock remains below $45, you keep the $200 premium, reducing your effective loss to $800.

Risks and Considerations

While covered calls can aid in recovery, they are not without risks:

• Capped Upside: If the stock price surges above your strike price, your gains are limited3.
• Continued Downside Risk: You are still exposed to potential further declines in the stock price.
• Assignment Risk: The option buyer may exercise their right to purchase your shares at any time before expiration.

Conclusion

Covered calls offer a strategic approach to recovering from trading losses. By generating income and potentially lowering your break-even point, this options strategy can help you rebuild your portfolio more efficiently than simply holding and hoping for a recovery. However, it's crucial to understand the mechanics and risks involved before implementing this or any options strategy. Remember, successful trading isn't about avoiding all losses, it's about managing risk and having strategies to recover when setbacks occur. As you navigate the path to recovery, consider keeping a detailed trade log to learn from your experiences and refine your approach over time.