Why Seeing Double is a Mirage

What do you do when a trade moves in an unexpected direction (and that direction is the opposite of up)?

Here’s what you may be thinking: “I liked this stock at 80, when I first bought it, so now that the price is 50 it’s an even better deal!”

Think again.

It can be tempting to buy more shares, envisioning increased profits in the end.  But “doubling up” on an options strategy almost never works.  Although it could potentially lower your cost basis for the entire position, it usually just increases your risk.

Keep in mind that options are derivatives, so their prices don’t move the same way, or even have the same properties, as the underlying stock.

So, when a trade goes south and you have visions of doubling up, recognize that this “deal” is just a mirage. Step back and ask yourself: “If I didn’t already have a position in place, is this a trade I would make?” If the answer is no, then don’t do it.

Close the trade, cut your losses, and find a different opportunity. It’s better to accept a loss now than dig yourself in deeper.

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