Today I’m highlighting a trade that’s a perfect example of why I don’t like stop-loss orders.
Because in my experience, they’re more likely to stop your profits.
It all worked out in the end, but — like I mentioned earlier this week — trades rarely go exactly as planned, particularly with options…
That’s why I can’t stress enough how important it is for traders to use proper risk management rather than relying on stop losses in my earnings options strategies.
Let me show you what I’m talking about…
On Monday, I alerted Weekly Blitz Alerts members to take a trade on Chinese mobile-based dating site and social networking company, Momo Inc. ADS (Nasdaq: MOMO).
The company was set to report earnings the next day, and the Blitz Tracker picked up on the big players making a big bet — buying over 2,000 contracts — on the weekly MOMO $14 strike calls.
The daily chart wasn’t the best, but the stock had high short interest, and any good numbers on earnings could force a squeeze higher.
Once MOMO reported earnings, the implied volatility came straight out of the pricing.
Look at the chart below, and you can see someone even sold a contract for a penny…
If I’d had any kind of a stop loss, the big market players would have stopped me out for a loss and picked up some cheap contracts on a quick and insignificant decline, crushing my earnings options strategy.
Because it wasn’t until late Wednesday that the stock started to wake up and move higher.
As it made that 5% move, the options tripled in a few short hours and my Weekly Blitz Alerts strategy closed the trade for a nice 48% gain in four trading days.
While stop losses can limit the amount of money a trader might lose, they can also keep traders from seeing the upside … especially in a short-dated option like this.
Check out the video below where I break down this trade and explain why there are better ways to limit your risk than stop losses for earnings options strategies.
As always, leave me a comment and let’s talk about your experience with stop loss orders. And be sure to subscribe to our YouTube channel if you haven’t already so you can be notified as soon as we post our next video!
P.S. What if everyday traders never had to stare at a stock chart again?
So they could just place a simple trade on Tuesday morning… walk away…
That means instead of refreshing news headlines over the weekend or stressing about how the markets will open on Monday…
They’re off for a quick three-day vacation to the beach, a national park or maybe just relaxing!