Hey everyone, I've spent several years trading volatile risky stocks and I've learned a few lessons along the way. I would like to share them here in case they may be useful to you.
Now before I begin, I want to make it clear that I'm not promoting any particular stock. Nor do I encourage anyone to trade risky volatile stocks. Your best bet is to consistently invest in a total market index fund like VTI and forget about it. If you must invest in individual stocks, invest in safe blue chip stocks like Apple or Amazon.
If you do invest in risky volatile stocks, realize that you can very well lose all your money. This isn't a joke or a game. Take it seriously. I'm sharing what I learned so you can hopefully minimize your risks and maximize your gains.
I don't own any BBBY shares now but I did own many of them earlier this year. In fact, I invested my entire life savings into BBBY shares. I bought at the right time, in late July-early August 2022. I ended up buying around 5000 BBBY shares and my total cost basis was $45,000. This represented my entire life savings as I don't have a 401k or IRA account. So you can imagine that I took on a fair amount of risk by investing my entire life savings in 1 stock. I did it because I wanted to swing trade and make a lot of money.
Now as you may be aware, BBBY share price went up by a lot in August 2022. On August 17th, my 5000 BBBY shares were worth $150,000. Yes, that's right. I had made $105,000 in unrealized gains. Unfortunately, like a greedy fool, I didn't sell. I wanted that $150,000 to reach $500,000 before I sold my BBBY shares. Yes, I was greedy and foolish and paid the price.
This brings me to my first lesson:
Always take profit when you're in the green.
You will never be able to time the top so don't even try. Remember, it's better to take some profit then to take none. If your unrealized gains is good enough for you to want to take a screenshot and send to your friends and family, then it's good enough for you to sell and realize those gains. Never forget that. Always sell when you're in the green. Don't be greedy and try to time the top so you can maximize gains.
My second lesson is:
When you're in the green, at least sell enough shares so that you've covered your cost basis. That way, you're left playing with house money.
This is a huge one. Cover your cost basis. If I had sold enough BBBY shares to cover my 45k cost basis, I would be in a much better financial situation now. Instead, I was greedy and decided to keep holding so I could make more gains. The best part of doing this is the relief you feel after your cost basis is covered. You know then that you're just playing with house money and even if you lose everything, it's ok because it's house money, not your initial money invested.
Like a naive greedy fool, I held on to my BBBY shares as the share price went down. I could have sold for a huge profit but I decided to keep holding. However, to my credit, I did sell all 5000 of my BBBY shares on Friday, September 2nd 2022 for $8.50 a share. In hindsight, that was a great decision because the BBBY share price kept slowly going down since then and the share price ended under $3 today, Tuesday, December 13th 2022. If I had kept holding those shares and not sold, I would have lost almost 30 thousand dollars.
This takes me to my third lesson:
Be ready to exit your position, even at a loss, if you feel you will incur more losses by holding on to your position. It's better to take a small loss than a big loss.
I really didn't want to sell my 5000 BBBY shares. I was hoping that the BBBY shares will go up in price like it did in August. However after analyzing the situation, I realized that the future didn't look bright for BBBY and it would be better I sold and took a $2500 loss rather than holding on to my shares and taking a much bigger loss. Looking back, I sure am glad I sold.
There was another reason why I sold and that's opportunity cost. After analyzing BBBY, I realized that even if the BBBY share price doesn't go down, it will most likely just stagnate and not make me any gains. It would be better to sell my BBBY shares and buy shares of a more promising stock which would make me more gains. That's what I did and it brings me to my fourth lesson:
In addition to financial gain and losses, always consider opportunity costs and the value of your time. Even if a particular stock doesn't make you lose money, if it doesn't give you gains, then consider the opportunity cost. Consider what you're missing out on by tying your money into this particular stock that isn't taking you anywhere.
The fifth lesson I learned is that even if your entry point to a particular stock isn't great i.e. you buy in at a high price and the share price subsequently drops, you can improve your cost basis by selling covered calls. This is especially useful for volatile stocks since they tend to have high implied volatility (IV) which usually means higher covered call premiums.
My fifth lesson is therefore:
Consider selling covered calls to reduce your cost basis and generate some income, especially if you own a lot of shares of a particular stock.
I'm not going to describe how to sell a covered call here because this post is long enough already but google and youtube will help you there.
Now I've been using BBBY as an example but these lessons are applicable to any risky volatile stock that you decide to trade with. I've traded several different risky stocks such as AMC, Palantir etc. in the past and the lessons I described above are applicable to all of them.
Anyway, that's it guys. I hope this is of some use to you. Please DM me if you have questions and I'll do my best to help. I know that none of the lessons I'm sharing are amazing secrets or anything like that. It's mostly common sense but many rookie traders forget to apply them. I wish someone had taught me these lessons before I started trading stocks which is why I made this post.
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