Hi everybody, I am writing an example to learn strategies reducing the losses. Please assume I have a stock (which is losing) in my portfolio. Please assume I have bought it at the price 14 and the quantity is 100. Which strategies could I use in order to reduce or maybe reset this loss?
Lots of things you can do option-wise. One strategy is, if you want to buy more, you can sell a near money put and out of the money call on it. Preferably the call will be sold at a strike that, when called, will allow a profit from your basis. You will keep both prems. You will get two option prems every time you do this. The risk of course is if the stock drops a bunch more you will be assigned the put and have to buy at the strike. Still, if things don't go crazy, you will soon be able to (maybe) raise your basis to profit. You do need to realize that this strategy doubles your risk, but less than buying another 100 shares would. Good luck.
The market absolutely doesn't care about whether you're in a loss or not (unless you're a whale about to be forced out that is). Chances are you will be making poor decisions while upset and trying to get out with a "reduced" loss. Yeah, you can sweep it under the rug with options but that's similar to martingaling (adding to losers) with similar associated issues. If there was zero overall risk everybody would be doing this. IMO best decision is to take the loss when it makes sense from market perspective (e.g. market decided to pull up a little bit temporarily) and then go on with trading life to new uncorrelated decisions.
If you think you can trade your way out of trouble, take your loss and start over. Maybe you'll find a stock that will move in your direction. Losses are inevitable. Keep them small.
Shortly, after you enter a trade, you should have a stop loss in place. Even better, you should have proper risk management and position sizing in place. Never risk more than 2% per trade. If you are a new trader, risk no more than 1% per trade. Small losses should not matter to you because if you are trading in the stockmarket, you will suffer losses. Big losses though, will decimate your account. And if you risk too much of your monies in your account, you will blow up and lose all your monies.
First, there must be a "good" understanding of the market and method in stock selection. Second, "budget" how much to lose when entering a position. Third, know when to get out. Spend 99% of your time in first step and 1% in step two and three.
Take scratch trades. Increase your odds by kicking out a percentage of your trades after entry. Sometimes you get in trades that are sub-optimal or turn sub optimal. Scratch them early, near BE. Start over with a better entry, price and probability.