Whether you are new to options or have been trading them for several months or decades, you know there is plenty to learn and discover about them. Essentially with stock, there are only two things you need to know: buy and sell. With options there are more moving parts, like implied volatility (IV) and the ever-famous option greeks. However, knowing more about options will not guarantee your success trading them. To me, trade management is way more important, and if you haven’t already, you need to make it a priority.
Let’s Be Honest
Clearly you need to put on potentially profitable positions to have something good to manage. But what I have found is that option traders struggle more with how to manage trades. Understanding your position including the option greeks is very important when managing trades but it goes deeper than that.
Psychology of Trading
The psychological aspect of managing trades is more important in my opinion. Too many traders (not just option traders) count on the “hope and pray” method of managing trades. I always like to say, there is not a problem with hoping and praying if you also have a trade plan in place. Having the discipline to exit trades as you planned is the key to your success, I promise you. Trade management can prevent you from not allowing a trade to move against you more than you planned or being too greedy on the profit side.
A Couple of Tricks
Mental and hard stop losses are not easy when trading options because of generally wider bid/ask spreads and slippage. But you need to find that discipline when you hit or exceed your mental stop loss. In addition, after taking some of my position off for a profit, I usually place a hard stop at or close to break-even and forget about the position. It is not perfect, but it can be effective.
Additionally, there is no excuse to not put profit-taking orders out there immediately after entering your position. Not only does this mean less work for you; it keeps you disciplined and from second-guessing your profit target.
As I said up top, I don’t want to make light of learning everything there is to know about options trading, but don’t forget to focus on what stands in many option traders’ way to being successful and that is trade management.
Senior Options Instructor
Market Taker Mentoring, Inc.