When stop-loss screws you

The markets were open again today after closing for what many called the storm of the century. There were some big moves both up and down in fast trading, continuing the wacky price action we've been having since early October. Double-digit moves and price gaps were seen for Generac, Impax Labs and others.

I mentioned buying into two positions on Friday just before trading ended and they've now been closed out (automatically) making them some of the worst trades I've ever made. Not worst in that the monetary loss was great, just particularly demoralizing.

Here's what happened - both Allot Communications (ALLT) and U.S. Airways (LCC) opened down this morning, just over two percent, triggering my trailing stops and selling my positions. However, by the end of the day both stocks were up over two percent.

What makes the trade so bad is that I was right, and I still lost money. Ouch. If I had been less conservative on my stop loss I would have made about $150 today, instead I lost close to $200 on the pair. However, I did come up with a better strategy for the near-term, one which has already put some money back in my pocket.

I purchased 100 shares of Cirrus Logic Inc. (CRUS) at 39.78 and sold a Nov. 12 - $42 call for a net credit of $190 after fees. Right now, the options markets are put heavy, so the calls are trading lower than the puts at the same strike. On some stocks, OTM calls have gone down so far they are a small fraction of their respective puts. CRUS, on the hand, has been doing well relative to the rest of the market and consequently, encourages more demand for its OTM calls.

Say CRUS goes up to over the $42 strike and I'm assigned in November. Then I'll make (42-39.78) x 100 + 2 x 100 - (15.98 + 9.95 in fees) = $396.7 or just a hair under 10 percent for less than a month of risk.

If the call expires worthless, then I'll reevaluate the situation and either sell the stock or sell another OTM call on it. If confidence in the stock starts to deteriorate, then I might instead sell an ITM call at $40 for December, just above my entry point. It's great to have options... pun intended.

Selling a call usually indicates a bearish or neutral outlook, but with the OTM call, the strike price is higher than my entry price, so I'm really using it as a moderately bullish strategy. One of the benefits of this approach is the premium I make from selling the option offsets some of the downside potential. (This is not a hedge however and should not be confused with one. With a hedge, movement in the opposite direction as expected will eventually become profitable or fix losses at a maximum.)

I decided picking the stand-outs would be a better decision that shorting a tech company and risking a quick turn-around to the corrections or some unanticipated spike. I considered shorting Amazon (AMZN), but I would hate for the markets to turn optimistic after the election results. As a leader, AMZN would likely enjoy some upward moment from any such optimism.

Still saving some buying power to see what happens over the next couple weeks. We're looking for signals for how long this correction will last, and I wouldn't be surprised if they coincided with election week.

Friday, we'll recap the week and look at charts of our present holdings and the indices. Until then, farewell.