I received the following inquiry from one of our talented new traders while going over our mentoring spreadsheet.

“I took a pretty big rip late in the day in this stock and wanted to know if I got out of it the right way; there was a battle between 48.12 and 48.15 and I paid for 100 at 48.16 when 15c lifted then buyer stuck the bid higher at 48.17 so I paid for 2nd lot at 48.18; my plan was to hit out of both if 48.15 came back to the offer but when 48.15 bid dropped it was almost instantly at the whole number which you can see if you look at the tick chart; when something ridiculous as this happens should I instantly sweep out or should I give it time to see if it will trade back up to my original entry prices because this was just a shakeout (which by the way it was since the stock basically traded up nearly a point afterwards); if I do give it room how much room do i give it…I’m already 15c out of the money do i give it another 5c, 10c? never really had this happen to me before so not sure how i should deal with if/when this happens again”

From time to time this will happen to any of us short term traders. A silly significant order comes into the stock and changes the price its by 10-15 cents. If you are expecting to make 20 or 30 cents in the play then risking 15 cents on the play screws up the math over the long run. Ideally you want to make trades where your risk is 1 unit and your reward is at least 5 units. This is an excellent question so lets discuss.

Let me start by saying that there is no right or wrong answer to this play. What it is important is that you develop a system for this “screw job” that you are comfortable with. Personally, this is what I look for:

1. Once the price change takes place I want to look at the immediate response on the box. In this case, are the next couple prints on the bid or the offer?
2. If next prints are on the offer, are the offers lifting easily? If that is the case then I try to weasel out of my position a couple of cents below my entry (12-13c in this example) and try to start all over.
3. If the next prints are on the bid then now you need to pay close attention to the amount of volume being done. If the bids are dropping then I would hit out of the position and start all over.
4. If the bids are absorbing a lot of size then I would just think this price change is just a shake out. In fact if I see enough volume on the bid I will consider buying one more lot. I would hit out of everything on the next bid drop and weasel out of the long closer to my entry again on the upside.
5. In the event that the bids do not absorb any real volume then you must hit out of the stock and wait for a held bid before buying back the stock.

However, for the newer trader it is almost always the case that the focus is turned immediately to the dollar amount being lost on the trade. If this is the case then you must consider hitting out of half your position. This allows you to get your attention back on the box and not on the PnL.

As a side note, I will be watching JPM this am. It is looking very strong in the box in premarket. Take a look at the 35.70 for an entry to the upside. Happy trading.

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