It's All or Nothing

Sean McLaughlin
March 12, 2024

Every once in a while, I’ll put on what I call “all or nothing” trades.

What this means in practice is that I’ll put on a defined risk options trade knowing full well that the trade is either going to net a profit, or it’s going to be a zero – a full loss of invested capital. There’s no in-between.

Usually, this happens because I love a setup, but the price level on the chart that would invalidate my thesis is pretty far away. If we get there, it’s more than likely that whatever premium I paid to enter the trade will have nearly evaporated. There will be nothing left to sell, even if I want to.

Two trades with March expiration options have concluded for me this week that demonstrate the yin and yang of these types of trades.

On Feb. 14, I put on a bearish bet in Hormel Foods $HRL. I bought the March 25 puts for 15 cents. This trade was put on at a time when I was looking to add some bearish exposure to my portfolio to help balance out the heavy long exposure I had in other positions.

Here’s what I said about it at the time:

Hormel releases their next earnings report on February 29th, and that has the potential to be the catalyst that catches everyone sleeping on the downside.

Let’s profit off their ignorance!

I like buying $HRL March 25-strike puts for 15 cents (or cheaper if we can get the middle).

This is an all-or-nothing bet. We’re either going to win, or it’s a zero. So I’ll be sizing my position fully cognizant of that very real possibility.

I liked this setup because as you can see before my getting involved (in the chart below), the stock had been in a pretty persistent downtrend. The stock also had earnings scheduled to be released in a couple of weeks, and my thought was if the broader stock market was going to fall apart, this stock would likely lead the way lower and the earnings catalyst might be just the thing to send the stock overboard.

Paying just 15 cents for the puts, I knew going in that we didn’t get a big whoosh lower in this stock soon, it was very likely there would quickly be a zero bid in those puts. Therefore, I will either win, or it’s a zero. All or nothing.

As you can see, it’s a zero. Oh well. On to the next one.

Meanwhile, here’s an example where an all or nothing trade played out to perfection.

On Nov. 8, I entered a trade in Uber Technologies $UBER. Here’s a quote from that post:

I classify this trade as “hard” right now for a couple of reasons that are apparent in this chart.

For one, short-term traders will blanche at buying right now, thinking they’d rather buy on a pullback. “It’s already ripped for 10 straight days!” they’ll say. Yes, they will. So what?

Secondly, there is price memory just up ahead in the $52 area that acted as resistance in 2021. Yeah, so what?

This is what makes it hard. This is what will make the payout worth it if we’re right.

I like buying $UBER March 60 calls for approximately $1.55 per contract. This premium I pay today is the most I will lose if this trade doesn’t work out, and I’ll be sizing my position accordingly. My feeling is that if this trade doesn’t work out, the options are a zero.

You can read the whole post here.

Here’s a chart of $UBER showing my entry on November 8th, and my exit on March 11th as we approach expiration:

We killed it on this trade. We paid $1.55 for the March 60 calls (they were out-of-the-money at the time). We exited yesterday for $17.55 per contract. This is our biggest win on the books so far for 2024.

In both the $HRL and $UBER trades, the amount of money I risked in each trade was nearly identical. My positions were sized in a way that if I took the full loss in either one, the net impact to my portfolio in dollar terms would be the same.

This is incredibly important. I never know ahead of time which trades will be the big winners for my account. So I have to make every attempt to normalize my risk across all trades. To be honest, going into both of these trades, I was far more confident that $HRL would’ve been the big winner. I was less so in $UBER.

The most important takeaway from these two examples is that it’s ok to risk 100% of the premium I risk in the trade, as long as my positions are sized appropriately and I make the wins worth it.

This win in $UBER far outstripped the “100% loss” I suffered in Hormel. That’s how we make the math work.

Trade 'em Well,

Sean McLaughlin
Chief Options Strategist
All Star Charts, Technical Analysis Research

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