As market volatility continues, here is a quick reminder to be cognizant about removing risk. If you know me, you have probably heard me say (at least a thousand times) to think of yourself as a risk manager first. But many times we take that for granted, especially when it comes to options. Let me explain.
What’s the Use?
The way the market has been behaving lately, there are many positions that can move quickly in our favor and of course those that can move quickly against us. The latter are what I am talking about here. Removing risk from your portfolio is not just about taking profits. It is also about reducing risk and protecting the position from further losses. Often, we are frustrated when a position goes against us, and we just give up. Trust me, we all have felt this way, especially early in our option trading careers. But you need to refocus and manage the trade as initially intended despite your frustration. Protecting the position from additional losses is the key to getting ahead and not letting big losses take you down.
Another option position that is often taken for granted is credit positions. Selling covered calls, cash-secured puts and vertical credit spreads. Many option traders will not close out the position and let the position expire worthless. Let’s be honest: More times than not they do, especially if 80% or more of the premium is gone. But why not remove risk totally? Although the odds are small, the additional gains when at 80% or more of the max profit pale in comparison to the risk that remains. In this market anything can happen, so be smart and get rid of the risk.
Be the Risk Manager
Once again this has been a friendly reminder to be proactive and manage your positions actively. This can make all the difference in the world and give you a fighting chance to keep extracting money from the market for a long, long time.