LEARN HOME / LESSON 5
When the trade goes wrong
The important moment comes when the original plan no longer fits the price, event risk, time remaining, or available cash.
A simple loss path
ILLUSTRATION You sold one $70 put for $2.00. The option later costs $4.50 to buy back.
| Item | Amount |
|---|---|
| Opening premium received | $200 |
| Cost to buy back | $450 |
| Gross result before costs | -$250 |
The planned $1.00 close target has no special power now. The reader needs to review the reason for the rise, the remaining time, the event calendar, the cash requirement, and the loss if the underlying continues to fall.
Assignment
Assignment can happen before expiry. If assigned on a $70 put, you may buy 100 shares for $7,000. If the market price sits below $70, you hold an immediate unrealised loss. The cash reserve makes the purchase possible. It does not make the loss disappear.
Rolling
Rolling closes one option and opens another. It should never act as a way to hide a loss. Treat the replacement as a fresh contract: check strike distance, event risk, liquidity, cash, concentration, and the new exit plan. If the replacement fails those checks, do not use it merely to delay a decision.
Stop and review when
- The share price moves sharply or a new event appears.
- The bid/ask spread widens and exit becomes harder.
- The option rises well above the opening credit.
- Expiry approaches and the assignment plan feels unclear.
- Available cash, concentration, or correlated exposure changes.
- You cannot explain why the original trade remains acceptable.
The option has not reached the planned close target, but an event arrives before expiry. What comes first?
The risk review comes first. A profit target is a working rule, not a promise. Re-check the event, time left, exit cost, assignment consequence, and cash before you decide.