in option-trading •  9 months ago

If you have been following my blog on options trading, today’s blog is a logical next step. Today I would to start with a framework and a way of thinking to explain how I manage my options trades.

I have some rules, but the rules are not as important as understanding of the methodology for managing the options trades and for understanding the inherent flexibility of options trading.

This is an important concept that’s I want you to understand, so I will review it here. When I place a trade I would like my premium to be about a third of the potential loss. So numerically this means if the potential Loss is \$300, I would like the premium will be at least \$100. This means I am willing to risk three dollars to make one dollar. Some people set their trades up as if they are willing to risk five to dollars to make one, but in general I go with the risk three to make one rule because I know I’m going to close the trade as soon as I earn 50% of the premium.

Restated this means the premium represents X dollars and in general I am attempting to get half of X and close the trade. So if the premium is \$100 what you’d like to get out of this trade is around \$50. The reason for this is a little complicated, so stay with me here. Because as soon as you get \$50 out of the street you’d like to close it, because once you’ve earned \$50 it’s not worth the initial risk of the trade for the other \$50. This is hard, so let me explain this; whenever you open an option trade you have the money that you can make it say \$100 and you have the money that you could lose which is perhaps \$300, so your risking 3 to make 1, with 80% odds of success. But once you are at point where you could close the trade and make \$50, you are now still risking the \$300 loss, but now it’s for \$50 not \$100, so now your risking 300/50 or risking \$6 dollars to make \$1 and although your odds are still 80% the return ration has dropped 50% and no longer worth the risk.

It’s important to remember that You don’t become a successful traitor by By making a lot of money on a single trade. You are successful by making multiple good trades, so as soon as the trader is good, I close it and I move on because it is the nature of the up-and-down action of the market that a trade which is up 33% this week might be down 5% next week or you might be down to being 15% ahead next week so you take your gain when you get can get it and you close to trade.

✍🏼 by Shortsegments.

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·  9 months ago

@tipu curate

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·  9 months ago

Upvoted 👌 (Mana: 0/2)

·  9 months ago

Thank you

·  9 months ago

Thank you

·  9 months ago

You are welcome!

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