Option trading exit strategies
Knowing when to exit an options trade is the most difficult part of trading options, according to a recent OptionsZone survey. But after several years of managing my shorting service and 25 years of trading options, I have some rules. These rules apply to option trading exit strategies trades option trading exit strategies are based option trading exit strategies fundamentals — i.
If you are a purely technical trader, well, read this anyway. My approach is best summed up by the poet — actually the country western singer — Kenny Rogers.
His four rules for managing a position: Keep reading to learn my options exit strategy. You should hold when the components of the story that originally drove you to take the position are still in place. However, the company is weakening, the stock is in a stagnant or downward technical pattern, the market segment it is option trading exit strategies is not running up and you are ahead of Wall Street in your view of the company.
If the fundamentals are still in place, then you should stick with your position. This is easier said than done depending on your level of experience and your nerves. For example, if you buy a put option on a lousy company, but it becomes an acquisition target, earnings are much better than expected, or some other option trading exit strategies part of the story changes, you should consider cutting your losses.
When to Walk Away You should walk away when you have profits or are nearing losses that are more important to your portfolio than they were when you first set up the trade. Yes, your portfolio, your account, your cash money. Trades do not float existentially in financial space — they are part of your investment portfolio, which is part of your wealth, and that, in turn, is part of your life. I rode a private Internet company into being a publicly held company, had a fortune on paper, lost sight of my financial goals and stuck with the stock.
If I had thought more about my life, I would have cashed out and retired. Since you are reading this, I am clearly still working. When to Run When I enter a trade, my goal is a double at least. One reason to run is when market sentiment turns dramatically option trading exit strategies you.
For example, if you have a put that option trading exit strategies six weeks before expiration and option trading exit strategies competitor to the company you have shorted reports great results, the entire segment could explode upward. The idea is to gain more leverage and an opportunity for another double. Pressing means to close the position, and then take your initial investment plus your profits and put it back into the same trade.
Sell Stops I never use sell stops. I find options too volatile when you are investing based on fundamental and unfolding strength or weakness in a company. However, I do recommend that people consider using a trailing sell stop when they have a large profit in a position.
Averaging Down Averaging down is tempting, and many traders do this successfully, but I am against it. I think of it as throwing good money after bad. I would rather close a position and move on than commit more money to a losing trade.
Averaging Up When a position is working, why not put more money to work if the fundamental story — i. Options may be a gamble, but the great thing about them is that the most you can lose is what you put in. So keep the iconic words of Kenny Rogers in mind and take an active role in managing your options positions.
Michael Shulman is the editor of ChangeWave Shortsan options trading advisory newsletter, and is a contributor to the OptionsZone Web site. At Option trading exit strategies Research, we are using it as an overlay to many of our best strategies to make them even better -- now you can, too. The Connors Group, Inc.