Secret 87 ALWAYS USE STOP-LOSSES, AND DON’T LOOK BACK

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Whether you are buying options or writing options, stoplosses

are an important lifeline to your success. Stop-losses are

exit points where if the option or stock price is hit, you automatically

exit the position.

Through many hours of system-back testing to trade stocks,

we found stop-losses greatly improved the results of the system.

Stop-losses will prevent you from taking major losses and letting

big profits slip away. Stop-losses would have saved many investors

from disaster during the most recent bear market.

Stop losses are a MUST for naked writers and credit spread

traders. If you don’t use them, you are doomed.

When entering stop-loss orders, I usually enter a contingency

stop-loss, where I exit the option position if the underlying

stock or futures hits the specified price. You can apply stop-losses

using the option price, but make sure to use the option bid or

asked price, not the last price because an option may not trade

for a long time, a long time after the stock or futures has hit the

stop-loss prices.

I prefer using the underlying stock or futures as the basis for

a stop-loss, for option prices can do funny things. Your problem

will be finding a broker who will allow contingency stop-loss orders.

However, there are brokers that will allow such orders, so

keep searching.

Another use of stop-losses is a trailing stop-loss. I usually

use a mental stop-loss here. Such a stop-loss is used to prevent

profits from slipping away. For example, if you have a call option

with a big profit, keep adjusting the stop-loss as the stock or futures

moves in your direction (i.e. keeping it 5% away from the

stock or futures price). When it reverses course and touches your

stop-loss, take profits.

Stop-loss orders are one of your most important lifelines, so

use them!

Moreover, when a stop-loss kicks you out of a strategy or position

or when you take a profit, don’t look back and second

guess yourself. Many times when you are stopped out of a position,

you would have fared better if you had not used the stop.

However, stops are designed to prevent disasters to your portfolio, and the one time you ignore a stop will be the time that does

you in.

Always obey your stop-loss point, especially when it comes

to option writing positions. If you hesitate and disobey that stoploss

one time, you probably shouldn’t be playing this game. The

statement, “If you hesitate, you are lost,” surely applies. You

must have the discipline to use and follow your stop-losses.

To repeat, when taking profits, don’t look back. You may

have fared better if you didn’t take the profits, but Monday morning

quarterbacking may result in losing a big profit in the future.

 

Whether you are buying options or writing options, stoplosses

are an important lifeline to your success. Stop-losses are

exit points where if the option or stock price is hit, you automatically

exit the position.

Through many hours of system-back testing to trade stocks,

we found stop-losses greatly improved the results of the system.

Stop-losses will prevent you from taking major losses and letting

big profits slip away. Stop-losses would have saved many investors

from disaster during the most recent bear market.

Stop losses are a MUST for naked writers and credit spread

traders. If you don’t use them, you are doomed.

When entering stop-loss orders, I usually enter a contingency

stop-loss, where I exit the option position if the underlying

stock or futures hits the specified price. You can apply stop-losses

using the option price, but make sure to use the option bid or

asked price, not the last price because an option may not trade

for a long time, a long time after the stock or futures has hit the

stop-loss prices.

I prefer using the underlying stock or futures as the basis for

a stop-loss, for option prices can do funny things. Your problem

will be finding a broker who will allow contingency stop-loss orders.

However, there are brokers that will allow such orders, so

keep searching.

Another use of stop-losses is a trailing stop-loss. I usually

use a mental stop-loss here. Such a stop-loss is used to prevent

profits from slipping away. For example, if you have a call option

with a big profit, keep adjusting the stop-loss as the stock or futures

moves in your direction (i.e. keeping it 5% away from the

stock or futures price). When it reverses course and touches your

stop-loss, take profits.

Stop-loss orders are one of your most important lifelines, so

use them!

Moreover, when a stop-loss kicks you out of a strategy or position

or when you take a profit, don’t look back and second

guess yourself. Many times when you are stopped out of a position,

you would have fared better if you had not used the stop.

However, stops are designed to prevent disasters to your portfolio, and the one time you ignore a stop will be the time that does

you in.

Always obey your stop-loss point, especially when it comes

to option writing positions. If you hesitate and disobey that stoploss

one time, you probably shouldn’t be playing this game. The

statement, “If you hesitate, you are lost,” surely applies. You

must have the discipline to use and follow your stop-losses.

To repeat, when taking profits, don’t look back. You may

have fared better if you didn’t take the profits, but Monday morning

quarterbacking may result in losing a big profit in the future.