The trade was: On the basis of this recommendation Feb futures were purchased at 31/-. Later, when the stock was not rising, as a protection, the 30/- Feb Put was purchased at 1/-. The cost of the futures is therefore 32. (31 + 1 for the Put ).
To breakeven, the stock must trade above 32. The maximum loss is 2/- since below 30 the PUT will provide protection. With Feb expiration nearing, what should be done?
The chart for REL PETRO is given below:
1. After a breakout that confirmed a double bottom, REL PETRO has fallen. We assume this is a reaction.
2. Chaos lines have given a buy signal, at the point marked a.
3. The RSI has been holding the 40 level. This is the support level for bullish stocks.
4. A stop was not mentioned, but a stop should be put under 28.
This is the background for the trade. Our actual trade is under pressure, since REL PETRO has to move up now and immediately, latest by Feb 28.
What should we do?
Such questions seldom have clear answers.
There was no time limit set for the possible up move. Stocks take their own time. Therefore, we have no way of saying that this up move will take place by FEB 28. But this is of small consolation to the trader who has taken the position.
The best solution will be to somehow push up the stock so that the trade does not lose money. But we have no power over the market so this option is ruled out.
1. The REL PETRO 30 FEB call should be sold for 75 PAISA. This will reduce the cost from 32 to 31.25. The maximum loss will then be 1.25 if RELPETRO falls below 30. Unfortunately, the minimum loss will also be 1.25. Therefore, this strategy reduced our loss to 1.25 but this amount then becomes a sure loss.
2. Do nothing. Wait for FEB 28, and since the market is bullish, we have a chance of making money / reducing our loss.
3. Close the trade. The PUT may be sold for 50 PAISA perhaps. So, we take a loss and look for new trades.
This trading tip ends on a rather unsatisfactory note. There is no “happily ever after” ending.
None of the alternatives assure a profit. In fact, this is a reality that all traders face, many times.
