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.