- Apple is at $610 you believe it will go to $680 in a month, instead of buying at $610 you want to buy on a pullback to $600, the pull back never comes and you just watch it go to $680 with no position.
- Apple is at $675 and you believe it will really go up a lot by October so you buy OCT AAPL $700 strike calls @ $20.00 Apple goes up to $720 by October expiration you were bullish but lost in the trade.
- Apple is at $570 in March you believe it will go back to $520 so you take a huge short position at $570, you blow up your account when you hold it as it rises to $644 with no stop, afterwards it falls to $520 in the middle of May.
Trade #1: Sometimes strong trends have no pull backs you just have to buy into strength. You should have multiple scenarios for buying a stock, one on a pullback level and one at a break out level.
If trade #2 was expressed with in the money options instead of out of the money options then the trader’s options would have had the intrinsic value of the option increase by $2,500 minus theta cost. This trade would have been very profitable.
Trade #3: If you do not manage your risk on every trade then you can lose most of your account the first time you are wrong. The odds are that you will be wrong sooner rather than later.