I think most option traders consider this a very volatile market, and they have for several months. When to take profits can be difficult to determine, especially in an environment like this. One of the hardest hurdles I had to overcome as a retail option trader was not taking profits too soon. I was scared and I exited trades well before my plan outlined. But in a market like we have seen, taking risk off the table sometimes prematurely is not a bad thing.
Swing Traders’ Nightmare
I have continually said in MTM’s Group Coaching class over the past couple of months that this market has made it difficult for swing traders (who generally take two- to five-day trades) to make money because of the volatility and lack of implied volatility. Day trading may be an easier way to extract money from the market at present because a trader is flat at the end of the day and not subject to hoping and guessing how the market will open the next session. I have also said it might be prudent to take profits and cut losses quicker than normal under these circumstances.
Tone It Down
To me this means looking for smaller profits and limiting yourself on the loss side too. For example, if you normally look for a 50% profit, maybe consider taking a 25% or 30% profit instead. That is why I always say to remove risk and put money in your pocket for a profitable trade. The market has been gapping so much that limiting your gains actually removes risk sooner. Remember your main goal as a trader is to preserve your capital and be a risk manager. Removing risk with multiple exits is also smart.
Same for Losses
The same goes for limiting your losses. Consider smaller contract size and risking a smaller percentage on each trade. So instead of risking 25%, for example, consider 15%. Of course, how you want to do this is completely up to you. Just use this as a general guideline.
Manage That Risk
As I like to say, the market is never normal or easy. But there are times when it is more volatile than others. This has been one of them, so it may be a good time to strap on your risk manager cap just a little tighter.
2 Responses
So True, John. From April till end of June, I had many option trades with 50% profit. Since about Independence Day, I have to constantly close trades much earlier for a 20-30% gain, or else risk loosing 60% later. The marker swings in one direction are much shorter and it will reverse without a good reason on many days. Orion gains seem to be more Scrooge-like. Now I understand low IV, as compared to HV is to blame. I’m glad you pointed it out.
Ella
After trying dozens of different strategies over the past 20 years, I’ve settled on three: covered calls, cash-covered puts, and vertical put spreads, with expirations one to six months out. I keep them in place until they either expire worthless or roll to another date. With about $140K of capital, I’ve been able to make over $1K/month since July 2022. An essential part of my strategy is to set $1K as the target at the start of each month and come up with enough trades to exceed the target before the month is out. So far so good. I don’t look at charts or earnings news dates or track the greeks, just the quality and price record of the company and the option chains for time value, bid/ask spreads, and daily volume.