To The Moon

This set of operation steps that can successfully stop loss is: sell put, covered put, collar.

After I post  "What if I don't want to take over short selling put？", I also made an order and found some problems. Then I had a brainwave and thought of a method that can stop the loss almost 100%. Let's taste it together.

100% successful stop loss strategy

Step:

• When the stock price breaks through the strike price, short 100 stocks. At the same time or later, when you think the stock price falls to a low point, buy a call with the same maturity date and the same exercise price as put(or high exercise price), and you can safely Wait to the maturity date, and don't worry about anything else.

For example, if you hold $Pinduoduo Inc.(PDD)$ put with an strike price of $50 on January 21, your share price falls below $50, and you short 100 shares. At this time, your share price continues to fall, so you can buy Pinduoduo call with an strike price of $50 on January 21.

Let's explain the principle and detail.

Covered put Strategy means shorting security while shorting put

• The position is: -100 shares, short put.

The advantage of this strategy：When the option expired，if the stock price is below the strike price, the-100 shares and put are exercised at the same time, we get the premium.

The disadvantage of this strategy: if stock price is above the strike price, although we can get the premium, we will lose money. Therefore, it is necessary to pay attention to the rebound of the market and close the position in time after shorting the positive stocks.

So when it comes to volatile markets, such as Pinduoduo$Pinduoduo Inc.(PDD)$, it will be very tangled.​

​However, if we buy a call with the same strike price and the same maturity date as put when the market falls sharply, we will change the covered put into Collar strategy.

• The position at this time is:Call,-100 strands, sell put.

The advantage of Collar strategy is that the due stock price is below the strike price,-100 shares are exercised with sell put, and the call price is zero.Net profit = put premium-call premium.

If the due stock price is above the strike price, then sell put gets the premium, call becomes in-price, and in-price options will be actively exercised, that is, buy 100 shares, then -100 shares will be closed, net profit=Put premium-call premium.

So the point is buy call. But whether we can make a profit depends on whether call can be bought cheaper than put. Of course, if you don't buy it cheaply, your biggest loss is only: call premium-put premium.

Operational focus

The difficulty in switching strategy is that if the stock price breaks through the strike price and continues to fall, we can safely turn from long to short. For example, AMD, which I did on Tuesday, never stopped after breaking through 146. But Pinduoduo is different. It is very uncomfortable to fluctuate back and forth, and it is difficult to judge the stock price trend.

Sometimes we need to buy and sell securities back and forth at the strike price to adapt to the market. If we change to put, we will lose time value.

Another reason for using securities is that short positive stocks can be exercised together with sell put.

Considering the loss of time, we can also buy forward put to obtain falling income to balance the loss of sell put. This strategy called calendar spread. Need to close positions in time when making profits.

And when you buy a call and change the hedging strategy into a Collar strategy, you don't need to do marking anymore. Although the call premium is deducted from the income, this investment is very cost-effective compared with worrying about the process.