What I Learned After Losing Money by trading options in PayPal.
I also discuss the major takeaways.
How I Lost Money Trading Options in PayPal
Around October 2021, I made a trade in PayPal.
I was short a $215 put strike in PayPal when it was trading around $228. Then, it had a poor earnings announcement and sunk down to around $203.
Those $215 puts were in the money, so I had to roll them down.
Thankfully, over the next few months, PayPal traded in a relatively tight range, between $180 and $190..
Usually, a stock with a large market capitalization will fill in a gap and retrace its prior losses after a significant sell-off.
PayPal, at the time, had a market cap of around $300 billion, and was 33% off its recent high.
But PayPal just kept falling.
I sold a combination of puts and calls when it was trading between $180 and $190. Those puts had strikes of around $170 - $175. At the same time, the calls were priced around $210 - $215.
In hindsight, I should have sold more call options and used that premium to close out the put options.
However, I felt that PayPal would retrace its losses and stabilize.
But it didn't.
PayPal had another earnings announcement in February of 2022, and this time it fell even more than it had before.
It went from trading around $175 to around $130.
One major mistake I made was that I added some additional put contracts on the put side before the earnings announcement.
Thankfully, I traded relatively small, but the losses were still painful.
In March 2022, I closed out some PayPal positions because PayPal continued to drop.
It fell from around $310 to about $95.
I don’t believe I’ve ever had an underlying fall ~70% on me in ~5 months. And the losses were significant.
Are they recoverable? Yes, of course.
But, it’s still painful.
My Major Takeaways from Trading Losses
It's vital not to trade too big. Had someone traded too large, a 70% drop in an underlying could have blown up their trading account.
There is no guarantee that a stock will rebound. If you look at Boeing, it traded around $340 prior to the 737 MAX issues, but, as of April 2022, it currently trades around $200.
Some other major takeaways are:
Place more emphasis on indices and less focus on individual stocks.
Buy put options as protection against tail risk.
Be cautious when rolling - don’t add risk to a position.
I thought that by adding more contracts to PYPL that everything would work out, but it ended up costing me money.
The problem is that even if the probability of losing money by adding risk was really low, it could still happen.
It is okay to sell additional call options. But don't add additional put contracts onto a position if you're challenged on the put side.
In the past, I've added additional put contracts to a position without running into any problems.
But, in this situation, adding additional risk cost me money.
While it’s possible that in ~100 other situations, it worked out well when I added more contracts, it only takes a few situations, where you’re wrong, to negatively affect your account.
Trade more short-term durations.
In the future, when I sell premium, I’ll likely shorten my durations.
This is my experience with PYPL and my important takeaways.
Please feel free to incorporate them into your trading, as it may help you avoid losing trades.
I will add these changes to my Education Course course and update it with the latest trading strategy. If you have any questions, leave a comment below.Visit BestStockStrategy.com, enter your email address, and receive over $400 of valuable free training.