Lose Money In Options Trading? Here’s Why Risk-Defined Options Trades Are Holding Up Well During Market Sell-Off

When the market makes a steep sell-off such as the one on Tuesday, do you find it’s easy to lose money in options trading? The market’s action certainly highlights the importance of stop losses and using risk-defined option trades.


While Advanced Micro Devices (AMD) had a shocking Tuesday session, losses were limited thanks to the trading strategy employed: a risk-defined bull call spread.

Other recent ideas have also held up well, such as this broken wing butterfly on Upstart (UPST) and this bullish calendar spread on Tesla ( (TSLA). Both can be closed for a nice profit, as can a recent bear call spread on 3M (MMM).

This iron condor trade on Nucor (NUE) is showing a small gain but is coming under pressure on the downside. So, this trade needs to be adjusted. One easy adjustment? Roll the bull put spread down to lower strikes — say, from 95-90 to 90-85.

This reduces the profit potential but gives the stock a little more room to move. You can learn more about adjusting iron condors here.

Techniques To Cut Risk, Lose Less Money In Options Trading

Square (SQ) stock dropped below the stop loss point of 245 for this leveraged covered call. While the stock might bounce back, it would be prudent to cut losses and wait for a new entry point.

With Tuesday’s sell-off, implied volatility has jumped. This means option premiums are elevated compared to a few weeks ago.

That can be great for option sellers looking at trades such as iron condors, bull put spreads, and cash secured puts.

However, risks are also high when volatility is high.

High Volatility Opportunities

Some stocks displaying unusually high levels of implied volatility include NUE, InMode ( (INMD)), Alibaba ( (BABA)), NetEase ( (NTES)), Blackstone ( (BX)), Las Vegas Sands ( (LVS)), Atlassian ( (TEAM)), and BHP Group (BHP).

Future volatility is the only unknown element in the option pricing model. So, we can gain an edge through buying options on stocks with low volatility and selling options on stocks with high volatility.

Please remember that options are risky, and investors can lose 100% of their investment.

Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ.


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Lose Money In Options Trading? Here’s Why Risk-Defined Options Trades Are Holding Up Well During Market Sell-Off