Secret 22DON’T LET PROFITS SLIP AWAY
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A major sin of an option player is to let a big profit slip away.
You must swing for the fences and go for the home runs, but you
must also protect the paper profits already in your position,
which is a difficult task. Therefore, stop-losses are critical, and
scaling out of a position as it moves in your direction is a wise
tactic. Here, you also need a trigger finger ready to capture the
rest of your profits when you see signs of a reversal.
Once you have a good paper profit, always set a trailing stoploss
on the underlying security or futures. A 5% stop-loss is a
good rule of thumb. In other words, if the underlying stock price
is 50, set a stop-loss of 47.5. If the stock price hits 47.5, take profits
on the rest of your position.
Also, sometimes a tighter stop-loss may be appropriate.
Ratchet up your stops as the underlying stock moves in your direction,
keeping them away from the present stock or index
price. However, even if the stop-loss is not hit, you may still exit
a position if you think the underlying stock or futures is flattening
out and when you believe it has hit some resistance or support.
(Check the charts.)
I can’t emphasize enough how important quick action is
necessary when things start turning against you. With options,
due to their short life, you are usually only given one chance to
get out. If you hesitate, you are lost !
A major sin of an option player is to let a big profit slip away.
You must swing for the fences and go for the home runs, but you
must also protect the paper profits already in your position,
which is a difficult task. Therefore, stop-losses are critical, and
scaling out of a position as it moves in your direction is a wise
tactic. Here, you also need a trigger finger ready to capture the
rest of your profits when you see signs of a reversal.
Once you have a good paper profit, always set a trailing stoploss
on the underlying security or futures. A 5% stop-loss is a
good rule of thumb. In other words, if the underlying stock price
is 50, set a stop-loss of 47.5. If the stock price hits 47.5, take profits
on the rest of your position.
Also, sometimes a tighter stop-loss may be appropriate.
Ratchet up your stops as the underlying stock moves in your direction,
keeping them away from the present stock or index
price. However, even if the stop-loss is not hit, you may still exit
a position if you think the underlying stock or futures is flattening
out and when you believe it has hit some resistance or support.
(Check the charts.)
I can’t emphasize enough how important quick action is
necessary when things start turning against you. With options,
due to their short life, you are usually only given one chance to
get out. If you hesitate, you are lost !