Mitigating Losses in an Option Position

Options are often known for increasing leverage with limited risks. However, losses are losses. Because options are less frequently used than equities, people often feel that there is nothing they can do when a uni-directional option bet does not go the way they have intended. In fact, they are many ways to mitigate losses or even sometimes to turn losing positions into profitable ones. The following is one of the many scenarios:

Scenario:
1. Losing position: Long VIX 20 call at $1.75. Currently, VIX is $17.80
2. Old cost: $1.75
3.Trader's new expectation: The market may not be as bearish as expected, VIX may not jump high.
4.Mitigating losses: Sell 2 VIX 20 call at $1.50 and buy 1 VIX 16 call at $3.00
5. New position: 1 VIX 20 call and 1 VIX 16 put (A bull spread)
6. New cost: $1.75 (incurred by the old position) and zero for the new position.

The new position has lowered the breakeven point from 21.75 to a much lower point at 17.75. VIX does not have to rise as high for the trader to break-even. On expiration day, if VIX closes at $18.50, the trader will have a small profit of $0.75 instead of a loss of $1.75 if he had stuck to his initial position. Note that this strategy is best applied with the new position incurring little to no cost other than commissions.

Hope this helps. Please feel free to comment if you have any other strategy to mitigate/reverse losing positions. For more details on option strategies, I find "Options as a Strategic Investment" by McMillan quite useful. It is much more practical than John Hull's " Options, Futures and other Derivatives".


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Leveraged ETF List

ProShares UltraShort S&P 500 Fund (SDS) Top 100

ProShares Ultra S&P 500 Fund (SSO) Top 100

ProShares UltraShort 20+ Year Treasury Bond ETF (TBT) Top 100

ProShares Ultra QQQ Fund (QLD) Top 100

ProShares UltraShort QQQ Fund (QID) Top 100

ProShares UltraShort Financials Fund (SKF) Top 100

ProShares UltraShort Real Estate Fund (SRS) Top 100

ProShares Ultra Financials Fund (UYG) Top 100

ProShares UltraShort Dow 30 Fund (DXD) Top 100

ProShares Ultra Real Estate Fund (URE) Top 100

ProShares UltraShort Russell 2000 Fund (TWM) Top 100

ProShares Ultra Oil & Gas Fund (DIG) Top 100

ProShares Ultra Dow 30 Fund (DDM) Top 100

ProShares Ultra Basic Materials Fund (UYM) Top 100

Barclays S&P 500 2X Long 2009 ETN+ (BXUC)

Barclays S&P 500 2X Short 2009 ETN+ (BXDC)

Direxion BRIC Bear 2X ETF (BRIS)

Direxion BRIC Bull 2X ETF (BRIL)

Direxion India Bear 2X ETF (INDZ)

Direxion India Bull 2X ETF (INDL)

Market Vectors Double Long Euro ETN (URR)

Market Vectors Double Short Euro ETN (DRR)

PowerShares DB Agriculture Double Long ETN (DAG)

PowerShares DB Agriculture Double Short ETN (AGA)

PowerShares DB Base Metals Double Long ETN (BDD)

PowerShares DB Base Metals Double Short ETN (BOM)

PowerShares DB Commodity Double Long ETN (DYY)

PowerShares DB Commodity Double Short ETN (DEE)

PowerShares DB Crude Oil Double Short ETN (DTO)

PowerShares DB Gold Double Long ETN (DGP)

PowerShares DB Gold Double Short ETN (DZZ)

ProShares Ultra 20+ Year Treasury ETF (UBT)

ProShares Ultra 7-10 Year Treasury ETF (UST)

ProShares Ultra Consumer Goods Fund (UGE)

ProShares Ultra Consumer Services Fund (UCC)

ProShares Ultra DJ-AIG Commodity ETF (UCD)

ProShares Ultra DJ-AIG Crude Oil ETF (UCO)

ProShares Ultra Euro ETF (ULE)

ProShares Ultra FTSE/Xinhua China 25 Index Fund (XPP)

ProShares Ultra Gold ETF (UGL)

ProShares Ultra Health Care Fund (RXL)

ProShares Ultra Industrials Fund (UXI)

ProShares Ultra MidCap 400 Fund (MVV)

ProShares Ultra MSCI EAFE Index Fund (EFO)

ProShares Ultra MSCI Emerging Markets Index Fund (EET)

ProShares Ultra MSCI Japan Index Fund (EZJ)

ProShares Ultra Russell 1000 Growth Fund (UKF)

ProShares Ultra Russell 1000 Value Fund (UVG)

ProShares Ultra Russell 2000 Fund (UWM)

ProShares Ultra Russell 2000 Growth Fund (UKK)

ProShares Ultra Russell 2000 Value Fund (UVT)

ProShares Ultra Russell 3000 Index Fund (UWC)

ProShares Ultra Russell MidCap Growth Fund (UKW)

ProShares Ultra Russell MidCap Value Fund (UVU)

ProShares Ultra Semiconductors Fund (USD)

ProShares Ultra Silver ETF (AGQ)

ProShares Ultra Small Cap 600 Fund (SAA)

ProShares Ultra Technology Fund (ROM)

ProShares Ultra Telecommunications ETF (LTL)

ProShares Ultra Utilities Fund (UPW)

ProShares Ultra Yen ETF (YCL)

ProShares UltraShort 7-10 Year Treasury Bond ETF (PST)

ProShares UltraShort Basic Materials Fund (SMN)

ProShares UltraShort Consumer Goods Fund (SZK)

ProShares UltraShort Consumer Services Fund (SCC)

ProShares UltraShort DJ-AIG Commodity ETF (CMD)

ProShares UltraShort DJ-AIG Crude Oil ETF (SCO)

ProShares UltraShort Euro ETF (EUO)

ProShares UltraShort FTSE/Xinhua China 25 Fund (FXP)

ProShares UltraShort Gold ETF (GLL)

ProShares UltraShort Health Care Fund (RXD)

ProShares UltraShort Industrials Fund (SIJ)

ProShares UltraShort MidCap 400 Fund (MZZ)

ProShares UltraShort MSCI Brazil Index Fund (BZQ)

ProShares UltraShort MSCI EAFE Fund (EFU)

ProShares UltraShort MSCI Emerging Markets Fund (EEV)

ProShares UltraShort MSCI Europe Index Fund (EPV)

ProShares UltraShort MSCI Japan Fund (EWV)

ProShares UltraShort MSCI Mexico Investable Market Index Fund (SMK)

ProShares UltraShort MSCI Pacific ex-Japan Index Fund (JPX)

ProShares UltraShort Oil & Gas Fund (DUG)

ProShares UltraShort Russell 1000 Growth Fund (SFK)

ProShares UltraShort Russell 1000 Value Fund (SJF)

ProShares UltraShort Russell 2000 Growth Fund (SKK)

ProShares UltraShort Russell 2000 Value Fund (SJH)

ProShares UltraShort Russell 3000 Index Fund (TWQ)

ProShares UltraShort Russell MidCap Growth Fund (SDK)

ProShares UltraShort Russell MidCap Value Fund (SJL)

ProShares UltraShort Semiconductors Fund (SSG)

ProShares UltraShort Silver ETF (ZSL)

ProShares UltraShort Small Cap 600 Fund (SDD)

ProShares UltraShort Technology Fund (REW)

ProShares UltraShort Telecommunications ETF (TLL)

ProShares UltraShort Utilities Fund (SDP)

ProShares UltraShort Yen ETF (YCS)

Rydex 2X Russell 2000 ETF (RRY)

Rydex 2X S&P 500 ETF (RSU)

Rydex 2X S&P MidCap 400 ETF (RMM)

Rydex 2X S&P Select Sector Energy ETF (REA)

Rydex 2X S&P Select Sector Financial ETF (RFL)

Rydex 2X S&P Select Sector Health Care ETF (RHM)

Rydex 2X S&P Select Sector Technology ETF (RTG)

Rydex Inverse 2X Russell 2000 ETF (RRZ)

Rydex Inverse 2X S&P 500 ETF (RSW)

Rydex Inverse 2X S&P MidCap 400 ETF (RMS)

Rydex Inverse 2X S&P Select Sector Energy ETF (REC)

Rydex Inverse 2X S&P Select Sector Financial ETF (RFN)

Rydex Inverse 2X S&P Select Sector Health Care ETF (RHO)

Rydex Inverse 2X S&P Select Sector Technology ETF (RTW)

COMEX Silver Bear Plus ETF (HZD-TSX)

COMEX Silver Bull Plus ETF (HZU-TSX)

Horizons BetaPro COMEX Gold Bullion Bear Plus ETF (HBD-TSX)

Horizons BetaPro COMEX Gold Bullion Bull Plus ETF (HBU-TSX)

Horizons BetaPro NYMEX Crude Oil Bear Plus ETF (HOD-TSX)

Horizons BetaPro NYMEX Crude Oil Bull Plus ETF (HOU-TSX)

Horizons BetaPro NYMEX Natural Gas Bear Plus ETF (HND-TSX)

Horizons BetaPro NYMEX Natural Gas Bull Plus ETF (HNU-TSX)

Horizons BetaPro S&P/TSX 60 Bear ETF (HXD-TSX)

Horizons BetaPro S&P/TSX 60 Bull ETF (HXU-TSX)

Horizons BetaPro S&P/TSX Capped Energy Bear Plus ETF (HED-TSX)

Horizons BetaPro S&P/TSX Capped Energy Bull Plus ETF (HEU-TSX)

Horizons BetaPro S&P/TSX Capped Financials Bear Plus ETF (HFD-TSX)

Horizons BetaPro S&P/TSX Capped Financials Bull Plus ETF (HFU-TSX)

Horizons BetaPro S&P/TSX Global Gold Bear Plus ETF (HGD-TSX)

Horizons BetaPro S&P/TSX Global Gold Bull Plus ETF (HGU-TSX)

Horizons BetaPro S&P/TSX Global Mining Bear Plus ETF (HMD-TSX)

Horizons BetaPro S&P/TSX Global Mining Bull Plus ETF (HMU-TSX)

MSCI Emerging Markets Bear Plus ETF (HJD-TSX)

MSCI Emerging Markets Bull Plus ETF (HJU-TSX)

NASDAQ-100 Bear Plus ETF (HQD-TSX)

NASDAQ-100 Bull Plus ETF (HQU-TSX)

S&P 500 Bear Plus ETF (HSD-TSX)

S&P 500 Bull Plus ETF (HSU-TSX)

S&P Agribusiness North America Bear Plus ETF (HAD-TSX)

S&P Agribusiness North America Bull Plus ETF (HAU-TSX)

US 30 Year Bond Bear Plus ETF (HTD-TSX)

US 30 Year Bond Bull Plus ETF (HTU-TSX)

US Dollar Bear Plus ETF (HDD-TSX)

US Dollar Bull Plus ETF (HDU-TSX)

ETFS Leveraged Agriculture ETF (LAGR-LSE)

ETFS Leveraged All Commodities ETF (LALL-LSE)

ETFS Leveraged Aluminium ETF (LALU-LSE)

ETFS Leveraged Cocoa ETF (LCOC-LSE)

ETFS Leveraged Coffee ETF (LCFE-LSE)

ETFS Leveraged Copper ETF (LCOP-LSE)

ETFS Leveraged Corn ETF (LCOR-LSE)

ETFS Leveraged Cotton ETF (LCTO-LSE)

ETFS Leveraged Crude Oil ETF (LOIL-LSE)

ETFS Leveraged Energy ETF (LNRG-LSE)

ETFS Leveraged Ex-Energy ETF (LNEY-LSE)

ETFS Leveraged Gasoline ETF (LGAS-LSE)

ETFS Leveraged Gold ETF (LBUL-LSE)

ETFS Leveraged Grains ETF (LGRA-LSE)

ETFS Leveraged Heating Oil ETF (LHEA-LSE)

ETFS Leveraged Industrial Metals ETF (LIME-LSE)

ETFS Leveraged Lead ETF (LLEA-LSE)

ETFS Leveraged Lean Hogs ETF (LLHO-LSE)

ETFS Leveraged Live Cattle ETF (LLCT-LSE)

ETFS Leveraged Livestock ETF (LLST-LSE)

ETFS Leveraged Natural Gas ETF (LNGA-LSE)

ETFS Leveraged Nickel ETF (LNIK-LSE)

ETFS Leveraged Petroleum ETF (LPET-LSE)

ETFS Leveraged Platinum ETF (LPLA-LSE)

ETFS Leveraged Precious Metals ETF (LPMT-LSE)

ETFS Leveraged Silver ETF (LSIL-LSE)

ETFS Leveraged Softs ETF (LSFT-LSE)

ETFS Leveraged Soybean Oil ETF (LSYO-LSE)

ETFS Leveraged Soybeans ETF (LSOB-LSE)

ETFS Leveraged Sugar ETF (LSUG-LSE)

ETFS Leveraged Tin ETF (LTIM-LSE)

ETFS Leveraged Wheat ETF (LWEA-LSE)

ETFS Leveraged Zinc ETF (LZIC-LSE)

ETFX DAX 2X Long ETF (DEL2-LSE)

ETFX DAX 2X Long ETF (Sterling) (DL2P-LSE)

ETFX DAX 2X Short ETF (DES2-LSE)

ETFX DAX 2X Short ETF (Sterling) (DS2P-LSE)

ETFX Dow Jones EURO STOXX 50 Double Short ETF (SEU2-LSE)

ETFX Dow Jones EURO STOXX 50 Double Short ETF (Sterling) (SE2P-LSE)

ETFX Dow Jones EURO STOXX 50 Leveraged ETF (LEU2-LSE)

ETFX Dow Jones EURO STOXX 50 Leveraged ETF (Sterling) (LE2P-LSE)

ETFX FTSE 100 Leveraged ETF (LUK2-LSE)

ETFX FTSE 100 Super Short Strategy ETF (SUK2-LSE)





ETFs within all subcategories:



Direxion Financial Bear 3X - Triple-Leveraged ETF (FAZ) Top 100

Direxion Financial Bull 3X - Triple-Leveraged ETF (FAS) Top 100

Direxion Small Cap Bear 3X - Triple-Leveraged ETF (TZA) Top 100

Direxion Small Cap Bull 3X - Triple-Leveraged ETF (TNA) Top 100

Direxion Large Cap Bull 3X - Triple-Leveraged ETF (BGU) Top 100

Direxion Large Cap Bear 3X - Triple-Leveraged ETF (BGZ) Top 100

Barclays S&P 500 3X Long 2009 ETN+ (BXUB)

Barclays S&P 500 3X Short 2009 ETN+ (BXDD)

Direxion 10-Year Treasury Bear 3X - Triple-Leveraged ETF (TYO)

Direxion 10-Year Treasury Bull 3X - Triple-Leveraged ETF (TYD)

Direxion 2-Year Treasury Bear 3X - Triple-Leveraged ETF (TWOZ)

Direxion 2-Year Treasury Bull 3X - Triple-Leveraged ETF (TWOL)

Direxion 30-Year Treasury Bear 3X - Triple-Leveraged ETF (TMV)

Direxion 30-Year Treasury Bull 3X - Triple-Leveraged ETF (TMF)

Direxion China Bear 3X - Triple-Leveraged ETF (CZI)

Direxion China Bull 3X - Triple-Leveraged ETF (CZM)

Direxion Developed Markets Bear 3X - Triple-Leveraged ETF (DPK)

Direxion Developed Markets Bull 3X - Triple-Leveraged ETF (DZK)

Direxion Emerging Markets Bear 3X - Triple-Leveraged ETF (EDZ)

Direxion Emerging Markets Bull 3X - Triple-Leveraged ETF (EDC)

Direxion Energy Bear 3X - Triple-Leveraged ETF (ERY)

Direxion Energy Bull 3X - Triple-Leveraged ETF (ERX)

Direxion Latin America Bear 3X - Triple-Leveraged ETF (LHB)

Direxion Latin America Bull 3X - Triple-Leveraged ETF (LBJ)

Direxion Mid-Cap Bear 3X - Triple-Leveraged ETF (MWN)

Direxion Mid-Cap Bull 3X - Triple-Leveraged ETF (MWJ)

Direxion Real Estate Bear 3X - Triple-Leveraged ETF (DRV)

Direxion Real Estate Bull 3X - Triple-Leveraged ETF (DRN)

Direxion Semiconductor Bear 3X - Triple-Leveraged ETF (SOXS)

Direxion Semiconductor Bull 3X - Triple-Leveraged ETF (SOXL)

Direxion Technology Bear 3X - Triple-Leveraged ETF (TYP)

Direxion Technology Bull 3X - Triple-Leveraged ETF (TYH)

ProShares UltraPro Dow 30 ETF (UDOW)

ProShares UltraPro MidCap 400 ETF (UMDD)

ProShares UltraPro NASDAQ 100 ETF (TQQQ)

ProShares UltraPro Russell 2000 ETF (URTY)

ProShares UltraPro S&P 500 Index Fund (UPRO)

ProShares UltraPro Short Dow 30 ETF (SDOW)

ProShares UltraPro Short NASDAQ 100 ETF (SQQQ)

ProShares UltraPro Short Russell 2000 ETF (SRTY)

ProShares UltraPro Short S&P 500 Index Fund (SPXU)

ProShares UltraPro Short S&P MidCap 400 ETF (SMDD)

source: http://etf.stock-encyclopedia.com/category/leveraged-etfs.html

Trading Journal

Why need a trading journal?
1. We cannot afford to keep making the same mistakes and we want to continue to do what we do best.

Investing or trading , if treated as a long-term business, must avoid mistakes being repeated and allow good moves being reinforced.

Writing down the rationale that motivates a trade will help us see a pattern in our trades. What are the common mistakes that we tend to commit? What are the common charasteristics of most of our profitable trades?

One or a few trades does not constitute a pattern, therefore unlikely to provide unbiased gauge.Optimists always remember the good trades while pessimists always remember the bad trades. How many times have we found ourselves boasting profitable trades and how many times have we mourned and groaned over failed trades. Neither is useful in forming good trading pattern. A journal that records all trade can give us a clearer and most importantly, an objective map to point out where the mistakes and good moves lie.

2. We want to trade what we plan
How many times have you heard traders say, "I could have made 50% more if I had stuck to my plan."? And how many wives have yelled at their husbands , " If I had not listened to you, I could have made $5000 more." It is just natural to want to find scapegoats instead of admitting one's mistake.

The mistake here is simply being human. Most of us, are affected by external factors. The wife, the friends, the family and the most powerful, the market. Very few of us were not rattled when everybody was talking about the end of capitalism, and the lost era, and the Great Depression once more.Very few of us can sit tight and hold on to winners when the Nasdaq has rallied more than 70% from the March-low.

Having a specific,detailed trading set-up plan written clearly in front of us can help mitigate this psychological weakness. To many of us, seeing the plan visually everyday can remind us why we want to stick to the plan in the first place.

3. We want to consider as many factors as possible

To make a good trade consistently, we not only have to be able to find the good pick and the right price, we also need to be able to recognize things that could go wrong and our contigent plans. Most of us do have these in our head. But it is common that they disappear in our memory as the number of trades increases or they have changed without giving us an alert. A trading journal serves as a constant reminder of possible risks and red flags. It allows us to constantly update and refine our plan to increase the probability of winning.


Every good trade begins with planning ahead. Sitting down and jotting down all the possible market movers such as FOMC meeting, unemployment data, companies's earning release, etc put our trade into different scenario tests so that we are not caught off-guard and have a better chance of minimizing losses should things really go wrong.


4. We want to form good trading habits/strategies

As noted above, trading journal can help identifying good trading habits and strategies. Identifying good trading habits and strategies is crucial but it is only one quarter of the game. The rest lies with the ability to execute the strategy. Repetition is the mother of all skills.

We mentally rehearse these habits and strategies every time we write down the same thing in the journal for each trade. Before we know it, it's become our second nature.

To celebrate this Saturday night (Duh!!! I know I don't have a life), I would like to share an example of trading journals with friends who are interested. Everyone has different trading needs and instruments. Therefore, each one of us will probably need to customize any template to our own style and needs. [Click the table to enlarge it]. Have a good Sunday!