As you know, on YouTube, many traders are showing you how much money they make with trading, but very few of them are actually talking about the bad trades, states Markus Heitkoetter of Rockwell Trading.
Well, you know what? I thought today I’ll address this head on because many of you had questions about a bad trade that I’m in. That trade being Lordstown Motors (RIDE).
I want to discuss why I entered the trade in the first place, what went wrong with this trade, how it’s hurting my account right now, and what I’m personally doing to get out of it.
Why I Got into RIDE
So far, my realized profits year to date are at $94,476. Pretty good, right? I mean, for only trading six months on a $250,000 cash account, which I’m using as a margin account. I have a stock buying power of two to one, $500,000 in buying power.
All of this would be handy, dandy, and good if there weren’t this one pesky, huge unrealized loss. This huge unrealized loss comes from one trade, RIDE.
Now, I want to tell you first quickly why I got into this, and then I want to show you what happened, what I’ve been doing so far, and what I’m planning to do.
Back in mid-February 2021, I was with my kids at a sailing regatta in Florida, and we were doing good. I have a few positions on, all is planned and then this massive snowstorm hits Austin, Texas. Snowmageddon! This meant that we are trapped in Florida. Yeah, boohoo, could be worse places to be.
Anyhow, I’m there in my RV. It’s a 44-foot motor home and we are stuck there, and you know what? I’m bored out of my mind, and this is when I start tinkering around with my trading plan, which I definitely shouldn’t have done.
I entered a trade and I took it with my Mastermind group. I said, “You know what? I am going to take an aggressive trade.”
Trading while bored is never a good idea, and I don’t like to trade the usual trades. But there was nothing to do, so I wanted to take a more aggressive trade. At that point, I liked Lordstown Motors and its story. Again, this is mid-February, way before Hindenburg Report.
I was selling puts at a strike price of 21.50, the premium was good, and the current price was somewhere around $26, so all was looking good.
What Happened to RIDE?
Pretty much the day before my options were to expire, the Hindenburg Report comes out and says that they have a bunch of orders that are fake, they’re not real orders, they’re just pre-commitments, and their trucks catch on fire. It was a scathing report.
The markets reacted, and within a few days RIDE fell from $24 to around $17, and I got assigned 7,000 shares at my strike price of $21.50.
Now, first of all, getting assigned is not a problem at all. I’m trading The Wheel Strategy and getting assigned is part of it.
I’ve been stuck in trades before that went against me. My plan when this happens is, as soon as the stock dips more than 30%, I am flying a rescue mission. A rescue mission means that now I am selling more puts hoping to get assigned, and therefore lowering my cost basis.
My Plan to Get Out of RIDESo, this all is still according to my plan, and that plan is, I will fly a rescue mission at some point when the stock is down more than 30%.
This means I needed the price to go down to around $14. At this point, I flew a rescue mission and sold more puts. I do believe it was for a 10 strike price.
I didn’t want to use all of my buying power for a rescue mission. For rescue missions, I like to fly in thirds. So instead of going in with 100 contracts like I would usually do, I’m selling only 30 contracts.
After I’m doing this and getting assigned, I’m lowering my cost basis to $15.79.
This basically means that I bought 7,000 shares at $21.50, and I bought another 3,000 shares at around $10. I now own 10,000 shares at an average price, this is the cost basis here, at an average price of $15.79 instead of $21.50.
Usually, what do you see? It is very, very rare that a stock will go down in a straight line. Usually what you see is that the stock is going down, bouncing a little bit back up, down, bouncing a little bit up.
This is where often you can apply Fibonacci lines, and this is why the Fibonacci tools are so powerful where you see these retracements.
However, RIDE is one of the rare stocks that does not like to bounce back. RIDE Is one of these rare stocks that actually went down almost in a straight line without ever bouncing back.
That of course causes a problem, because if I’m owning 10,000 shares at a cost basis of $15.79, and the prices are now at around $9-$10, I cannot sell calls anymore.
Now, this is part of my strategy, The Wheel Strategy, that I’ve been very successfully trading for a long, long time, where I made in almost $95,000 in realized profits.
How RIDE Has Affected My Account
This one here is a bugger, it just did not want to bounce back. It gets even worse, and here’s why.
Since I have been flying a rescue mission with one-third, where I actually bought another 3,000 shares, I’m flying more rescue missions because I still have another two-thirds available. I’m selling puts, 30 puts at a time, at a level of $8 and $7, hoping to get assigned.
What does RIDE do? Never goes low enough to actually get me in so that I can lower my cost basis anymore.
Now, with my Mastermind members, we have been following this trade together, and many of them have actually been able to get assigned and lower their cost basis.
I don’t know what happened here, this is just one of these trades where nothing goes according to plan. Well, a few things went according to plan, but here I didn’t get assigned. This means that my cost basis is still sitting at $15.79 and RIDE, at one point, went all the way down to a low of $6.69.
When you have a cost basis of $15.79, you have a difference of $9.10. When you have a loss per share of $9.10, and you own 10,000 shares, that is an unrealized loss of $91,000.
This is how bad it got. However, I was still following my plan because that’s what I like to do. I have a plan, and I’m following my plan, and I’m selling more and more premium. By doing so was able to collect $14,248 in premium.
So yes, I am sitting on a big unrealized loss, but then I have realized $14,248 that I collected in premium. That money has been deposited in my account. I can subtract this, which is around $14.28. I’m deducting this from my cost basis to get at a new breakeven of $14.37.
What Is Happening with RIDE Now?
This is where my cost basis is, and now the magic happens. RIDE actually popped up to $15.80.
The key question here that you might ask is, “Did you get out?” No, I did not, and there are actually two reasons for it, and I want to tell you exactly why.
1) When that happened, I wasn’t in front of my computer, I’m not watching the stocks all day long. Usually, my trading routine is such that I’m only looking at the markets for 30 minutes in the morning. After this, I’m walking away, I’m doing other stuff, and I’m living my life.
I did not see when RIDE went all the way up to $15.80, and I did not see when shortly after this it crashed all the way down to $11.
2) The 2nd reason is super important. Let me explain this to you according to my plan. According to my plan, I am selling calls against my existing position.
I sold 100 hundred calls, at 15.50. These are covered calls because I own these 10,000 shares, and I sold another 200 calls that expire tomorrow (at the time of this writing).
Now, here is what happens when the stock jumps up to call options. I mean, if you know options, then you know that as the stock goes up, these call options become worth more money.
This is why I’m making money on the stock. On the stock, yay, I’m making money, and on these options, before expiration, I would lose money. Part of the game.
How much were these options down when this happened? We are talking about the 15.50 call, and they went as high as $1.07, so means that on the option I would lose $10,700, even though right now with the stocks I would be at breakeven.
So even if I were in front of my computer at this time, I might not have liquidated it, because if I had, I would have still suffered a $10,700 loss.
Now, obviously, everybody can say, “Well Markus you should have done this.” Yeah of course. Woulda, coulda, shoulda.
You see, in hindsight, we are all the greatest traders. What happened here? We had positive momentum, this was all before the report with the SEC was filed and it looked good, right?
I mean, Lordstown Motors just announced that they will take their Lordstown Week virtual, where they let the whole world see what is going on.
I mean, I don’t know how good you are at chart reading, but even if you just know some simple chart reading, you see that we have a solid one, two, three formations here, and we broke above number two.
From a chart formation standpoint, this is a solid uptrend. Also, you know that I like to use my indicators, and the three indicators that I like to use, according to the PowerX Strategy, are RSI, stochastics, and MACD.
All of this looked really, really good, and this is where we saw that RIDE has been in an uptrend. Then the news hit, and of course, you can never factor in the news, and it went all the way down.
What Do I Do Now?
Honestly, when I looked at the chart at this point when everything was going on, it looked good. RIDE just recently had the highest volume ever.
What am I doing right now? I am aggressively selling calls at, or slightly below, my breakeven.
I have an order in there to basically roll this week, so this will expire worthless. By doing so, it will add another $1,000 to the existing $14,000. This is good, it brings me up to more than $15,000.
The next thing that I want to do here is, for next week, sell the 14 call. My idea here is that for this I would like to achieve a credit of 50 cents. A credit of 50 cents means $5,000 for the size that I’m trading.
Depending on what Lordstown does, I’m willing to lower it to $3,000 at the time of this writting. You see, if I can make $3,000 per week on Lordstown Motors, that will be good. Obviously, I know that there is a good possibility that Lordstown can go further down.
There was a massive move. We went from $10 to almost $13 on some rumors that they might have secured funding.
Now, hope is not a strategy. I’m not hoping that they will secure funding, but here’s what I see.
I see that if there is a small pump, and at this point the pump might only be, right now we are trading at $10.59, so if it is from $10.59 to $11.50, the 14 call option will double in value.
This is when I can possibly, instead of $3,000, bring in $6,000 or $8,000 per week.
What does this do? It lowers my breakeven to a point where I can get out with maybe a small loss. And you see, for the size that I’m trading, a small loss would be around $20,000. That’s a fairly small loss for me, it would be absolutely OK.
See, based on $250,000 in cash, $20,000 is less than 10%, closer to an 8% hit. If I’m basing it on the margin of $500,000, it would be a 4% hit. It really depends on how you see it. Some of you might do it based on the cash; others might do it on the margin. So that’s what I’m looking for.
Where Do I Stand with RIDE Now?
As of now, RIDE is down. The stock is down $51,000, and I collected $14,284 in premium. So right now, I’m down about $36,000.
It’s not too bad. I mean, yes, let’s face it, that’s not nice. $36,000 based on my account size is around 15%. It’s not nice, but it’s manageable.
Think about it. Have you ever done a trade that took down your account by half, or by even more? In the beginning of my trading career, I did super stupid trades. I was placing trades that brought my account down by 50% to 60%.
What I’m looking for right now are these pops where we go from $10.50 to $11.50, because the implied volatility that is governing options premium for RIDE is kind of off the chart.
The implied volatility is 242% right now. Two days ago, it was 300% and 400%.
What I noticed earlier is as soon as we see a one-dollar pop, which happens all the time, this is when it’s not that nice. I have to watch it a little bit more throughout the day, which is really not my style.
I really don’t like to obsess about stocks. Not sure about you, I like to go on with my life. But here I do have to watch it a bit more, since right now we are really in trouble, and I have to get out of this trade.
My goal here is again, with hopefully a small loss, we shall see. This is why I’m looking right now for these pops, because honestly, this little pop for the size that I’m trading is probably worth around $1,000. Currently, every $1,000 helps.
Right now, the loss is around $35,000. Once I’m getting to a loss of $20,000, I’ll be fine. Another $1,000 is being added to the realized profits. I’m going from $14,284 to $15,284. And then the idea is right now to sell the 14 call, and by selling the 14 call I would probably make $5,000.
Now, why would I sell the 14 call if my breakeven right now is $14.39? Doesn’t that mean that I’m losing money? No, because for this I’m bringing in 50 cents, so this lowers my breakeven to $13.89.
Anyhow, this is what is currently happening, and this by no means is ruining me or, I don’t know, changing my living style. Yeah, it would suck if I lost $20,000, but it’ll probably honestly take me four to six weeks to make back that money.
This is why I’ve shown you earlier thus far I’m sitting in $95,000 in realized profits, but let’s see how it goes.
Learn more about Markus Heitkoetter at Rockwell Trading.