The consequences of breaking rules...

Analysis of DLTR pre-ER trade

I have a 32 page trade plan that spells out exactly how I deploy my risk capital, the amounts in terms of what I’m willing to lose (2.5% of my account), as well as the exact set ups that I look for when placing an order.

During our Swing Trading / ER Strategies Group (fee paid) livestream on Sunday, 15 May, we identified DLTR as a good candidate for a long play to capture both a potential price rise (based on a bounce on the 50 sMA and lower Bollinger Band) as well as an increase in Implied Volatility leading up to its scheduled earnings report on 26 May.

Two DLTR May20/May27 $170 call calendars were bought for $3.10 each (total of $620 risk) with a planned loss exit at a $250 and/or a stock close below the 50 sMA. The following day, DLTR declined over 3% and lost the 50 sMA. I did not follow my trade plan and didn’t close the trade, which was at a $236 loss at the end of the day. Being a retail stock, DLTR rode the coattails of WMT and TGT when they reported earnings and plunged an additional 14.4%; the value of my calendar was now at a $484 loss.

As DLTR closed below the 3 standard deviation Bollinger Band on May 18th, I decided to try to “repair” the position by selling two DLTR May27 $130/125 bull put credit spreads for a $1.95 ($390 credit but an additional $610 in risk).

The short DLTR May20 $170 expired worthless on Friday and I am left with the current position:

I broke my trade plan rules in two ways, both of which are related to money management.

1. I did not close the trade after it broke and closed below the 50 sMA. My loss on closing would have been $236.

2. By adjusting after a nasty and unexpected decline on Wednesday, I added more risk than my trade plan tolerates. Note that if the adjustment does not succeed, I will lose $1230. If it succeeds, my loss will be paired to $230.

Shame on me. As I write this, my inner voice is telling my I should just accept the current loss and close the trade on Monday.

This is a tough market at the moment and we are entering bear market territory. Emotions are high and mistakes happen. We need to learn from those mistakes and understand what happened so that we can try to avoid them in the future.

Our Swing Trading / ER Strategies Group preplanned plays continue to outperform. Note that all plays below are planned on Sunday evenings in a livestream for premium members of this blog and Optionsplayers.com. My DLTR trade is still open; most of the group closed it and took the loss when it broke plan… We discussed 6 additional plays for the coming week this evening, Sunday, May 22nd.