The Money Tree

Safely Generating Income in Retirement

Update – HGT

Posted by mounddweller on January 20, 2012

Fellow Traders,

I want to update you on my covered call trade in Hugoton Royalty Trust (HGT).  Yesterday, I closed out this trade at a substantial loss.  However, my dismal result was entirely preventable.  I made a couple of mistakes usually attributed to ‘newbies’, not guys like myself who have been trading and investing for 30 years.  You’d think after this long I would be immune to such bone-headed moves.

You may recall that I successfully traded HGT on 2 previous occasions.  This third time was looking to be equally successful before I made my mistakes.    Back in March 2011 I bought 500 shares of HGT and sold AUG calls.  These calls expired OTM and I sold another round of NOV calls.  These too expired OTM.  Shortly after the NOV expiration HGT began to trade a little lower.  I continued to keep an eye on it so I could sell another round of calls 4-6 months out.

Mistake #1 was not keeping up on what was going on in the natural gas market.  Natural gas prices have fallen sharply in recent weeks.  They now trade at generational lows.  Mistake #2, since my position in HGT was a trade and not a long-term holding, I should have exited the postition when HGT approached my break-even price.  Mistake #3 came a week or so ago when I compounded my problems by buying more shares thinking the stock couldn’t fall much further.  How many times have you heard “never try to catch a falling knife”?

After finally coming to my senses yesterday I sold my 1,000 shares of HGT for a sizable loss.  A loss of almost $3,700!  It is mistakes like that that wipe out the returns on many great trades.

Word to the wise…do NOT let small losses turn into big ones.  Admit your mistake in the trade and get out.

Am I going to swear off HGT and never trade it again?  No way!  I made some mistakes but the strategy is still sound.  Once HGT does find a bottom I will be back in it again collecting its monthly dividends and selling covered calls.





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