One thing we do as humans is turn the simple into the complex. We do this because we overwork our capacity to think. The good news is that we humans also have the capacity to reason, and this is where we should over rule the pure thinking process. You see, when we reason, we work through what we know, eliminating variables (thoughts) to arrive at conclusions. We take our thoughts, order them, slice and dice them, and then see what is left. When we just think, we don’t actually go through the process of accepting or rejecting our thoughts, so we get stuck in a confusing place, a place where we cannot see the “forest for the trees,” so to speak. In this place, the simple can become the complex. Thus, the question today, at least from my perspective, is a case of turning the simple into the complex …
Do you have general rule for when to exit option trades on the downside? For stocks I use 8 to 10% as a loss I will take, One way would be to exit when the underlying stock drops that much. Problem is, as you know, options behave differently, can be down when stock is up, etc.
P.S. I am just looking for a general guideline here.
Okay, as a general guideline for any business deal or investment of any kind, set your maximum loss parameters based on what you can afford to lose. In a specific trade, whether it be options, futures, forex, or equities, set your exit on the downside based on your strategy, which should define how much you can afford to lose in any one trade, and your total capitalization determines how much you can lose in any one trade.
This is how my mind works. The resource is money, so no matter how you utilize that resource, the same rule always applies – never risk more than you can afford to lose. Over thinking this simple rule will get you into trouble.
Trade in the day; invest in your life …
