Nobody ever said trading was easy. But, you have more control over your success than you think.
Risk management is the key to winning in trading, and with options there is nothing more important. Some ‘older’ sages say ‘let your runners run.’ Good advice if you’re a stock trader but horrible advice for an options buyer.
TICK TOCK
Why? Time decay. The clock is working against you at all times. Volatility. The movement based on expectations for options can be a killer if you’re leaning the wrong way. So, what do you do?
TWO RULES
Here are the two rules: take profits when you have them and size your positions correctly.
We’ll talk about the first rule here, taking profits. Sounds simple and easy, right? I will tell you flat out that selling is the hardest thing for a trader to do. I’m often confronted with the dilemma of other traders asking me about exits. What’s interesting is they know when to leave a trade —they just want to hear it from someone else.
I had someone email me the other day about some put positions he was long, some had good profits. One was GES, the teen apparel retailer. He had amassed a very nice 129% gain on these puts, riding it down. Earnings were due this week.
I asked him, ‘what are you waiting for?’ He didn’t tell me, but I told him what I would do —sell this option and play a 29/27 strangle for 2.30, that way I’ll be booking a nice gain and covered for a big move. Well, on Thursday the stock turned sharply higher and the strangle would have paid off.
DON’T DAWDLE
I’m not sure what he did with his put play. But this is what needs to be done: think about the trade, your profits and move your feet. If he stayed on the puts his profit would have been wiped out entirely, and then some. And of course, left wondering ‘what if.’ You always have ‘options.’
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Bob Lang has a newly re-launched website at www.explosiveoptions.net, where he manages subscribers, writes a newsletter, hosts webinars and has just opened a brand new chat room. Post your options questions for Lang below.
