We got into a trade expecting big profits, but instead, the exact opposite happened. Now we’re losing big on a trade and don’t know what to do. Do we hold it hoping for a turnaround? Get rid of the position and take our lumps? Put the capital into something else?

In this article, we’ll look at these options, and others, to hopefully rescue that bad trade.

A Loss is Already a Loss

While we do want to rescue our trade and see the money we have lost returned to the account balance, the truth is, whether that position is opened or closed, that loss is real.

Many people think a loss isn’t real until the trade is closed. That’s not true. There’s less capital in the account to now trade, it’s increasing stress, and it’s taking up time to read articles like this on how to get out of the mess.

A position underwater is already costing us time and capital, whether the trade is closed or not. Get rid of the notion that it isn’t real yet. It is.

Rescuing a Losing Trade By Finding The Best Current Trade

If a trade is in a big loss on a long position, and we choose to hold onto it, the price needs to go up to make us our money back.

If well sell the position and buy something else, the new asset’s price needs to go up to make money.

(1) Holding onto a trade, or (2) exiting the trade and putting that capital into something else, are essentially the same thing. It is just a matter of determining which trade, 1 or 2, stands to make us our money back the quickest.

If we had put $10K into trade and now that trade is only worth $5K, whether we keep our money in that trade or move it into something else, we can still only make money on the $5K. If the price goes up 20%, we are now up to $6K, whether we held on to our current trade or closed the position and bought something else that went up 20%.

Thinking about it any other way is just mental-wheel-spinning, not reality. The $10K put into the trade no longer matters. What matters is what we do with the $5K left, and finding the best home for it.

The choice then becomes:

• From this moment forward (past doesn’t matter), is the investment I’m holding likely to perform better than another trade I am eyeing? Where is the money I have left most likely to grow?

Remember, we can only make gains on what our position is worth RIGHT NOW. If our stock is still dropping, and another stock is setting up for a nice run to the upside, we are better off selling our current position and buying something that can start making us money now.

We can always get back into the old trade if it starts going up, but in the meantime, transfer the capital into something that is more likely to start making money now.

As mentioned, if we started with $10K in a position and now it is only worth $5K, the only thing we need to consider is: “What asset has the best chance of going up and making some of my money back?”

Most people, by default, stay in the stock they are in because they liked the stock to begin with. But now that it has fallen by 50%, is it still the stock you thought it was? Is there something better?

If your goal is to get back to breakeven, then the price needs to go up 100% from its current level.

Looking at the stock now, is it setting up to rally 100%? Is there another trade that’s MORE likely to move up 100%?

The one with a better chance of the rally is the better choice. The stock market doesn’t care what our entry point is; we only make money based on what happens from this moment forward.

Or maybe there’s a trade right now that could pop 20% based on a setup or chart pattern we know. If our current trade is an unknown, but we can likely make 20% on this other trader, we’re better off putting our capital into this new trade and making back some of our loss. At a minimum, we will be out of the big losing trade and looking for more productive places to put our money. As an added bonus, this is often instant stress relief.

Sometimes selling and moving to cash is the best trade. Because while cash isn’t going to make us any money back, we will have that cash to put into better trades when the time comes. By doing so we also avoid the risk of further losses.

My Complete Method Stock Swing Trading Course guides you through the process of stocks that are likely to rally 20% or more over the next few weeks. 

Other Ways to Rescue a Big Loss

Above we discussed holding or transferring that capital into something else that is likely to make our money back quicker.

There are other options, including the options market. Here are some other alternatives

Average Down

Averaging down is putting more capital into a trade that isn’t working. By doing so, the average purchase price is lowered. This may work out if the price does in fact rise after the second purchase. If the price drops after the second purchase, now the loss is going to get even bigger, very quickly, due to the larger position.

Averaging down isn’t a great choice. It can work, but it is more of a gamble than a consistent money-making strategy.

Average down on the wrong trade, and all money could be lost. Avoid it.

Note: “Scaling in” is different. That is a pre-planned strategy to deploy capital at various prices or time as part of an overall trading/investing plan.

Write a Call Option to Rescue a Losing Stock Trade (long)

If you own shares, and the price has dropped, you can potentially start making back some of the loss by selling a call option.

Assume you purchased Netflix (NFLX) stock at $350 right before their announcement. A few days later the stock is trading near $210. Ouch. This scenario happened in April of 2022.

The stock is now $210, and nothing will change that, but you can start chipping away at the damage or at least partially offsetting further losses.

Choose a call option that expires a month out or longer, and that has a strike price above the current price.

Let’s use $250, with an expiry near the end of May (one month out).

If we sell this option, assume we receive $2.38 for each share. (this was the last price traded for the option, on April 25 when NFLX was trading near $210).

Each option contract is for 100 shares.

If we own 100 shares of NFLX, we sell one call option. If we own 200 shares, we sell two call options. If we own 300 shares, we sell three call options. etc. If you own an odd number of shares, such as 246, only sell two call options (200 shares). In other words, round down.

Assume we own 100 shares of NFLX, so we sell one call option and receive $2.38 x 100 = $238.

That goes into our pocket and helps offset our current loss of $14,000 [$350 – $210 = $140 x 100 shares = $14,000].

So $238 isn’t much when losing $14,000 but at least it is something productive. The next month, we may be able to write another one, then we get a bit more money coming in.

If the stock price keeps dropping, we keep the $238 and it helps offset further losses.

If the price rallies, our loss is reduced on the stock position, and we still get to keep the $238 assuming the price stays below $250 before the option expires at the end of May.

If the price moves above $250, before the end of May, the option contract will be exercised by the buyer, we lose our shares, but the loss on our stock has been reduced and we get to keep the $238.

Basically, no matter what the scenario, we are about $238 better off. And if we can keep writing the option month after month (we need to alter our strike price), then we can slowly collect additional monies from selling options while the stock price, hopefully, recovers.

If we did this for 5 months, with 5 different options, we could make about $1200 (5x 238, assuming we make about the same amount each time), and assuming none of the options get exercised we still own the stock which has its own profit or loss. But the options offset that loss or add to the gain.

What I don’t like about this is that we still holding a big loss. We make a tiny bit back with the option, but if the stock keeps dropping, that loss is a much bigger deal. We are band-aiding a much bigger problem: the existing loss.

Options Repair Strategy for Long Stock Position

The above is a simple option strategy, while the Repair Strategy involves more options and is a little more complicated.

For this strategy, we will need a losing long stock position, and then we are going to sell 2 call options for each one call option we buy.

As discussed above, when we sell a call option we make some money, called the premium, but we are under obligation to deliver the shares we own at the strike price (if the price goes above the strike price).

When we buy an option, we need to pay for it. We are the ones paying the premium in this case.

By selling two call options and buying one, the money received partially pays for the call option we buy. There is usually some cash outlay required.

Using our NFLX example, we own 100 shares at $350, and the stock is now at $210.

Buy one call at a strike of $210 (current stock price), or choose a higher strike to reduce the cost of the option. This gives you ownership of another 100 shares at $210 (or whatever strike you choose).

Sell 2 calls with a strike price near the midpoint of the loss (and above the strike of your bought call), which is $280 (midpoint of $350 and $210…add them and divide by two). You are now obligated to sell 200 shares at $280 if the price rises to that level. You own 100 physically, the bought call option gives you another 100.

Your breakeven price is now $287.5 (350 share purchase + 225 call purchase / 2) instead of $350.

The actual prices for these options with a July expiry (3 months out )are:
$210 strike option costs $19.70.
$225 strike option costs $13.10.

Selling two $280 strike options provides $2.45 x 2, or $4.90 per share in revenue.

If we get the $13.10 option with a strike of $225, our cash outlay is $820 [(13.10 x 100) – 2.45 x 100 x 2].

Depending on how big the loss is, it will usually take at least a month, sometimes more, for the price to recover, this is why options three months out were selected.

• If the price stays at $210 or drops, all the options are worthless, we are still in our losing stock position, and we lost an extra $820 on the options.
  
  
• If the price gets above $280, we no longer own any shares. We lose $7.50 per share because our shares get called away at $280, which is $7.50 below the breakeven of $287.50. We also lost $8.20 per share on the options. So the total loss is $15.70 per share ($7.50 + $8.20). Had we done nothing, we would still own shares at $350 and be losing $70 per share (price at $280).
  • We could pick other options, such as a $290 strike, then we wouldn’t lose the $7.5, and would make $2.5, but the price has to rise more and we will receive less for selling those options so our cash outlay will be higher. There is always a tradeoff.
    
    
• If the price gets above $225, the strike price of our bought call option, then the loss is likely reduced compared to just holding the stock positions. Obviously, the higher the price goes the better.
  • The price needs to get above $233.2 ($225 + $8.20) in order for the options to overcome their own cost and start making money. So basically, if the price can get above $233.5 then this trader is better off having taken the option positions. If the price stays below $233.5, the options aren’t helping them.

Basically, we still need the price to go up. So if the stock doesn’t look like it is going to go up, then don’t use this repair strategy because we end up wasting more money on options and increasing our loss.

Buy a Put Option To Prevent Further Losses on a Long Position

Buying a put option requires an additional cash outlay, but if your long stock position continues to drop, then the put option increases in value which offsets the loss on the stock position.

Assume you still own shares of NFLX at $210, but you are afraid the stock may keep dropping. $210/share is your line in the sand. You can’t handle a loss bigger than that. You can buy a one-month put option with a $210 strike for $13.45 (x100). That’s the actual price at the time of this article.

That’s a steep price, because you now need to cough up another $1345 or 13.45 per share.

If the stock price goes up, you wasted $1345 but your stock loss gets smaller (and maybe you had some peace of mind with owning the put).

If the price drops, the put only makes you better off if the stock price drops below $210-13.45 = $196.55. The put protects below $210, as the option will increase in value, but until the price gets below $196.55, it hasn’t saved you any money on your long position. For example, if the stock price goes to $200, your original position would have lost $10, your options has likely gained about $10 in value, but you paid $13.45 for the option so you are still $3.45/share worse off than having just held the stock (no option).

Should You Try an Options Rescue?

With all these rescue strategies, the stock still has to eventually go up to recover the loss.

So it all comes down to what we talked about earlier in the article:

Is this bloody thing likely to go up? Or is something else more likely to go up?

Pick the asset likely to go up. Or move to cash and wait for such opportunities if the price isn’t showing signs of turning around.

If you are holding the stock that you think is likely to go up, then consider one of these option rescue strategies. But be aware that some of these strategies may limit your upside. Selling a call or using the repair strategy limits your upside. Some strategies also require more capital outlay, which is like averaging down.

I prefer just cutting the loss at a set level (discussed below). Then put that capital into another quality trade setup and start making the money back that way. But that is just me. This was the choice I discussed first.

Avoiding the Big Loss in the First Place…For Next Time

It is far easier to avoid a big loss in the first place, then we don’t need to rescue our positions.

There are several ways we can avoid big losses.

• Utilize a stop loss on trades. A stop loss gets us out of a trade if it doesn’t do what we expect.
  
  
• If making a short-term trade stock trade, don’t hold through earnings announcements. Why? Because the NFLX scenario can happen, even to big, solid (seemingly) companies. Not worth the risk to me.
  
  
• If trading forex, don’t hold a position through a major news announcement that affects the pair you’re trading, especially if the price is currently close to the stop loss. The price can easily gap through it resulting in a bigger loss than expected.
  
  
• Control the position size. When holding stock trades overnight, don’t put all capital into one stock. Spread it out. Ideally, keep the overall risk of any single trade to 1% of the account. We do this through a combination of stop loss orders and position sizing. If a position is losing more than 1% of our total account, cut the loss and move on to something else.
  
  The same goes for forex; don’t lose more than 1% of the account on a trade. Typically with forex, we’re using leverage and may have more than 100% of our capital in a single trade. This is generally ok because the market doesn’t close during the week…but it does on weekends, so be wary of holding trades through the weekend if your stop loss is near by.

Want to learn how to day trade the EURUSD? The EURUSD Day Trading Course shows you how to crush the forex in under two hours per day.

By Cory Mitchell, CMT

Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.