SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Options and Invisible Risks


Entry and exit timing is crucial to successful options trading, without doubt. However, one form of risk not often acknowledged is the risk of taking too many actions, too soon, and for the wrong reasons.

The "greed and panic" factor is not unique to options trading. Everyone who has bought stock and lost a big segment of capital knows all about it. The price moves rapidly up so you buy more, and then it all evaporates when the price reverses. Or the price moves down and you panic and get out just before prices rebound. It's the old "buy high and sell low" strategy, when we all should be buying low and selling high.

 

With options, the tendency is the same even while the product is different. Some traders forget that today's price of anything is just the latest in an unending series of price swings. It is not a starting point or the ending point of value, and despite the best intentions, price does not move in the direction we want only because a trade has been opened. Options traders, like everyone else in the market, is vulnerable to wishful thinking. The first step in overcoming this all too human tendency is awareness.

 

Deciding when to enter should rely on several attributes. These include volatility as well as skillful chart reading and recognition of emerging patterns, notably reversal patterns. It also relies on a study of fundamentals and knowing how those affect the technical side.

 

Once in a position, decide when to exit. Set goals for yourself so you know when the timing is right to take profits and move to the next trade. Your goal should set a profit target based either on dollar amount or percentage of return; also set a loss bail-out point, where you will get out of a losing trade to minimize net losses. You're better off booking a small loss than a total loss a few weeks later. This is not as easy to follow through, but it's important to increase overall profits. Succeeding with setting goals and following them is tough, but worth the effort.
 

Image result for options trading entry exit
 

The key to effective use of options is to use them to manage and hedge risk, not to replace one risk with another one - especially when the new risk is based on greed and panic rather than on trend watching and logical analysis. As the old adage reminds us, bulls and bears can both succeed in the markets, but pigs and chickens get slaughtered. So if you are most interested in low-risk trading, a quick and easy solution is to know your markets.

 

This ultimately may be the secret to success in options trading. Knowing when to act, either on entry or exit, and also being able to follow through on profit and bail-out points, overcomes the tendency to demand either triple-digit profits or complete losses, and settle for nothing else. The true contrarian succeeds in trading options. This often misunderstood method is not merely doing the opposite of the market crowd; it is an observation of motive. Most traders act and react emotionally. The contrarian uses cold calculation and analysis, resisting the emotional urges of greed and panic. The contrarian must apply strong discipline to go against the majority, remembering one crucial point: The majority is wrong more often than not.

 

Michael C. Thomsett is a widely published author with over 80 business and investing books, including the best-selling Getting Started in Options, coming out in its 10th edition later this year. He also wrote the recently released The Mathematics of Options. Thomsett is a frequent speaker at trade shows and blogs on his website at Thomsett Guide as well as on Seeking Alpha, LinkedIn, Twitter and Facebook.

Edited by Kim

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • A Global Equity Put Write Portfolio

    Many that sell equity market put options focus on the S&P 500 (SPX, XSP, SPY). Some will add small caps by selling puts on the Russell 2000 (RUT, IWM). An investor could also make their put selling strategy globally diversified by adding MSCI EAFE (EFA) and Emerging Markets (EEM).

    By Jesse,

    • 0 comments
    • 199 views
  • The Random Walk Hypothesis

    The “random walk hypothesis” (RWH) is one idea about how stock prices behave – but only one of many. It is a theory promoted in academia and believed in my many, but not so much by traders involved with handling real money. Theories aside, is the market truly random?

    By Michael C. Thomsett,

    • 0 comments
    • 279 views
  • How To Trade Options Successfully

    I’ve now been trading options for over a decade and been associated with Steady Options for seven years – hard to believe.  Over that period, I’ve learned quite a bit about option trading; how to improve, what not to do, and generally how the option markets work. I’m still learning.

    By cwelsh,

    • 3 comments
    • 525 views
  • January 2019 Performance Analysis

    No one likes losing money, and no one likes hearing "excuses". However, in an effort to be fully transparent, solicit feedback, and to improve our own performance, we're writing this article to do a further breakdown of the losses which our model portfolio incurred in January 2019. 

    By Kim,

    • 17 comments
    • 1,321 views
  • Island Clusters as Strong Reversals

    Options traders constantly seek the elusive reliable reversal signal. A few unusual but strong reversals are worth looking for, and their patterns reveal likely exceptional timing for opening or closing option trades. One example of this exceptionally strong signal is the island cluster (or, island reversal).

    By Michael C. Thomsett,

    • 0 comments
    • 357 views
  • What’s Wrong With Your 401(k)? (If anything)

    There currently are over sixty million Americans that are active 401(k) participants, and well over 500,000 total active 401(k) plans offered by employers in the United States.  Despite these high numbers, usages could be higher, as the US Census Bureau estimates that only 41% of all employees with access to a 401(k) plan utilize it, with even less funding it fully.

    By cwelsh,

    • 0 comments
    • 439 views
  • Upcoming Decay of Options

    I am on the hunt for a short volatility position for three main reasons. First, the market’s wild swings have, for the time being at least, diminished. Second, option activity has dried up as my options barometer continues to be stuck in the 4 – 6 range as traders are not making big bets in either direction.

    By Jacob Mintz,

    • 0 comments
    • 519 views
  • The Scientific Process of Increasing Expected Returns

    For many US investors, the "base case" for equity investing is US large cap stocks, most commonly benchmarked as the S&P 500. You could absolutely do far worse than owning these 500 great US companies, and the weight of the evidence suggests that most actively managed mutual funds that benchmark themselves against the S&P 500 index have in fact done worse.

    By Jesse,

    • 0 comments
    • 901 views
  • Those Golden and Death Crosses

    The use of moving average (MA) for predicting future price behavior must be undertaken cautiously. MA is a lagging indicator, so the question must be: Can a lagging indicator provide guidance for the future? Yes. The use of two MA lines and how they interact is a reliable form of reversal indicator.

    By Michael C. Thomsett,

    • 0 comments
    • 632 views
  • Trading Reverse Iron Condors When IV Is Elevated

    Our members know that pre earnings straddles and calendars have been our bread and butter strategies in the recent years. We enter those trades when the prices are cheap compared to previous cycles. However, in the last few months of 2018, Implied Volatility exploded, making most of those trades too expensive.

    By Kim,

    • 0 comments
    • 705 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs