Consider this a friendly reminder about managing your option trades. With the craziness and the volatility of the market over the past few months, I have gotten multiple questions during MTM’s group coaching class and especially through email about managing trades. For the most part, the trades in question are losing ones. I always tell these traders the same thing: Know exactly what you will do, no matter what happens, before entering any trade.
What I mean by that is to have every conceptual twist and turn covered. If the underlying does this, you will do that and so on. What I find too often is that most traders have soft plans in their head, and the emotional trade manager comes out when that is the case. Most traders do not want to think about losing money. But we need to.
I know that when I started out as a young retail trader, I thought about my profit exits and did not really think too much about the exits for a loss. I would tell myself that if it goes against me, I will get out somewhere. That is not good enough.
Plan your trades based on profit targets and how much you are willing to risk percentage wise. In addition, use technical analysis to help guide you for profit and losses as well. Let’s be honest, many if not all of your option trades are derived at least in part from technical analysis. So, doesn’t it make sense to manage the position using it too?
Managing trades is the key to your potential success as an option trader. Clearly it is no guarantee that you will make money, but without a well-devised management plan the odds of doing so look really bad.