How Scenario review can improve Trade Setups

If new to reading my Blog you may not be aware that I often include scenarios in my trade setup Blog posts. One of the key reasons I take the time to do this is that it forces me to think through how a trade can play out – and what I would/can do in any given scenario. By making this effort it does help in the Trade Design process – to aide in ensuring that a trade can withstand a variety of outcomes.

To illustrate this I will discuss a trade in $ETN that I did this week that demonstrates how important this can be – when something follows a planned path. Here is the trade:

ETN_tradeOn 01/21 I went Long the Jan 24 Weekly $77 Puts & Short the Jan 31 Weekly 76 Puts – this is a Long Diag Put Calendar. This was done for a small credit. The plan was to play any short-term weakness and then get a lower entry next week (by being Put stock as a potential outcome). That was the plan.

So let’s see how it has played out so far:

ETN_BPrice fell through the 50 SMA and closed near the lows of the day (as did many stocks) on the overall market weakness. I let the Long Puts get assigned to me so I am short stock at $77 going into next week. This gain is capped however by the Short Puts for next week so I have a few choices now:

1) If price stays under $76 I can let the trade unwind for me at Friday expiration

2) If price stays under $75, next week I can adjust the Short $76 Put strike to an expiration further out (potentially for a small credit)

3) Price could rebound by next Friday – and if so – I would cover the short stock at an appropriate level

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