Lesson on recovering from being wrong

I find the biggest challenge in this game is what to do when you’ve made an option trade based on your conviction that ends up being totally wrong.

I have been doing both options and stock investing for 4 years. I often get good momentum on trades many times in a row. Then instead of cutting losses, I hold firmly to my belief that my thesis still holds and end up rolling and piling on bad trades.

I originally thought that all of this talk about ending the war was just media hype. And I kept believing the media scare mongerers saying we’re in for a recession and high gas prices for a long time blah blah. I kept piling on the bearish trades. Finally with today’s opening of the Strait of Hormuz, I had a Eureka moment and closed out the bad trades.

Fortunately I kept my losses to a minimum because I did bullish put spreads on PFE during this whole time and held onto shares of PFE stock. So even with all of my bad trades, I still have managed about a slight uptick during this turbulence.

There are a few big lessons from this:

1) Risk Management will keep you solvent. Use value stocks or cash to buffer your portfolio. Spread trades among different types of stock types and different strategies so they don’t all move the same direction. Cut losses when trades are clearly not on your side.

2) Don’t hold onto bad trades and fight the market. Nobody cares about your reason why the market is irrational. Accept being wrong and move on.