Sometimes I exit my misbehaving trades when at my stop loss. Other times, I use adjustments to try to scrape my way back to breakeven so I can exit with dignity intact. The stop-loss approach is usually what I use with directional trades like long calls and bull calls. I’m more likely to adjust with cash flow trades like naked puts and credit spreads.

Scaling-in is my most common technique, and I’ve discussed it before (see here). Today we’re looking at how I redeemed a WORK naked put gone bad.

The Entry

On July 13th, WORK scored a sweet-looking breakout over $35. Due to the unfilled earnings gap overhead, it had plenty of room to run. Intraday, the stock pushed well above my trigger point, providing plenty of confirmation for a naked put trade.

I sold the Aug $30 put for 94 cents. Instead of deploying a full position, I entered half. That gave me the flexibility of adding more later if the stock misbehaved.

Unfortunately, by the end of the day, WORK suffered a nasty reversal and closed below support. Since my naked put was still far OTM, and below support, I let the position ride. This is almost always my approach with short puts.

The Adjustment

In deciding when to add the second half of my position, I usually wait for the value of the put to rise at least 50% higher than my original entry. In this case, that was $1.41 (94 cents x 1.5). However, I also want evidence that the stock is pivoting higher.

After the failed breakout, WORK stock continued lower and broke the $30 support level. But then on July 30th, after seven straight red bars, a bullish reversal candle formed. On that day, I sold another Aug $30 put for $2.20. In doing so, I raised my average credit from 94 cents to $1.57 ((94 + 220)/ 2). By increasing my size, I put myself in a position to recoup losses quicker if WORK finally bounced back. At the same time, I was taking more risk by doubling the size of my trade.

The Exit

Fortunately, the technical signals worked this time. Over the next few trading sessions, WORK rallied back, and I was able to exit the short puts at $1.57 on Aug 3rd.

Though I entered a bullish leaning trade when the stock was $35 and later exited near $30.50, I still broke even. Not bad.

Now, you may reasonably ask why I didn’t stay in longer. The answer is because the posture of WORK wasn’t bullish anymore. When I entered the initial trade, it was above its 50-day and 20-day moving averages. When I exited, it was below both and had broken a major support level ($30) along the way.

The only situation where I’d typically stay in longer is if I want to own the stock as a core position in my portfolio. Given Slack’s extreme relative weakness versus the rest of the market, I’m not willing to give it that status.

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