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

  • Put/Call Parity - Two Definitions

    Put/call parity is a term options traders use to mean one of two things. The simplest definition and the one most applicable to most options traders compares the similarity in the bid/ask spread and the net debit or credit resulting from this.

    By Michael C. Thomsett,

    • 0 comments
    • 173 views
  • Put Selling: Strike Selection Considerations

    When selling puts, such as we do in our Steady Momentum PutWrite strategy, there are many questions a trader must answer: What expiration should I use? What strike should I sell? Should I choose that strike based on delta or percentage out of the money?

    By Jesse,

    • 0 comments
    • 222 views
  • What Can We Learn From UBS YES Lawsuit?

    News followers may have seen the recent stories on UBS being sued by its clients and investors who participated in UBS’s “Yield Enhancement Strategy (YES).”  Evidently, numerous UBS clients signed up to participate in an iron condor strategy that lost a lot of money.They’re angry, and they’re filing a lawsuit.

    By cwelsh,

    • 2 comments
    • 825 views
  • Pinning Down the ‘Option Pinning’

    What many people on SO have in common is that they have read the books of Jeff Augen on options trading. Although written a decade ago they continue to be an interesting source of strategies for the retail investor. Retail investors have particular constraints that make most of the broad theoretical musings on options rather moot.

    By TrustyJules,

    • 0 comments
    • 338 views
  • Holding Positions into Expiration

    "Every once in a while you must go to cash, take a break, take a vacation. Don't try to play the market all the time. It can't be done, too tough on the emotions." - Jesse Livermore

    By Mark Wolfinger,

    • 0 comments
    • 268 views
  • Tales Of How Big Trades Went Wrong

    One way to learn from your past mistakes is having to go through the painful and challenging experience of explaining them. Another way is to listen to others who might have lived through some disgruntling trades. Joseph Trevisani goes deep into the rationale he followed during the volatile EUR/JPY days of 2007 in this article.

    By Kim,

    • 0 comments
    • 273 views
  • Covered Straddle Explained

    The covered straddle is a perfect strategy for those all too common sideways-moving trends. When a company’s stock is in consolidation, how can you make trades? No directional trend exists, so most traders simply wait out this period.

    By Michael C. Thomsett,

    • 0 comments
    • 420 views
  • Why Doesn't Anchor Roll The Long Calls?

    Recently, an Anchor subscriber asked, “Why don’t we roll the long calls in the Leveraged Anchor portfolio after a large gain and take cash off the table?”  This question has a multi-part answer, from taxation to how the delta on a position works.

    By cwelsh,

    • 0 comments
    • 253 views
  • Backtesting Pre Earnings Straddles Using CML TradeMachine

    Our members know that buying pre earnings straddles is one of our most consistent and profitable strategies. Yet some options "gurus" continue conducting studies, trying to prove that the strategy doesn't work. Today we will show how to do the backtesting properly, using the CML TradeMachine, the best backtester in the industry.

    By Kim,

    • 0 comments
    • 745 views
  • Building a Short Strangles Portfolio

    In my last article I showed you what you can expect selling short strangles and straddles and how much leverage is appropriate. Today I want to show you how to build a well diversified short strangle/straddle portfolio and how to trade it through difficult times.

    By Stephan Haller,

    • 7 comments
    • 643 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