We had a bad short biased trade in retailer TJ Maxx that isn’t going well. I wanted to go over the trade now and where it stands and analyze what went wrong and how we could have minimized the damage. First, the trade from June 22nd:
Trade TJX ($66.60) Buy Aug 65 Put for 1.50
This trade was based largely on a weak technical set-up and shows the danger of not bailing from a trade as soon as you realize the technical set-up doesn;t play out the way it looks like it was about to. What do I mean, check out the white circle on the chart from the time when we placed this trade. Waning momentum, potential death cross, the stock had just failed miserably at a breakout attempt a month beforehand. But the breakdown never came, the death cross never came, and the stock has now climbed fairly orderly back to the highs:
In the original post this is what we said as far as rationale for the trade (bold emphasis mine):
Rationale: The technical set up is weak, the stock reacted poorly to perceived good news last month and options are cheap. If I get the chance to sell a lower strike put on a move lower to reduce my break-even prior to Q2 results I will. As usual with long premium directional trades I will use a 50% premium stop.
Obviously the technical set-up aspect was wrong. And as soon as the stock held we should have immediately been on the defensive. In fact, we had two chances to get out of this trade without a total loss when the stock retested and then held the 50 day moving average in early July and then once again in late July, bounces (circled in white on the next chart) that virtually guaranteed that the stock was about to go higher and that there would be no death cross:
So the lesson here is that if techincals drew you to a trade originally (this wasnt the only input, but it was important), you have to respect them when they start to tell you you’re wrong. The TJX chart repeatedly told us we were wrong and we should have immediately cut our losses. We didn’t and now the trade is a worthless lotto ticket with the stock near highs at 71.40. Lesson learned and we’ll try to be more vigilant.