Finding the Exit

You’ve probably heard this one a million times before. When trading options, just as when you’re trading stocks, it’s critical to control your emotions. That doesn’t necessarily mean you need to have ice flowing through your veins, or that you need to swallow your every fear in a superhuman way.

It’s much simpler than that: Always have a plan to work, and always work your plan. And no matter what your emotions are telling you to do, don’t deviate from it.

HOW YOU CAN TRADE SMARTER

Planning your exit isn’t just about minimizing loss on the downside if things go wrong. You should have an exit plan, period – even when a trade is going your way. You need to choose your upside exit point and downside exit point in advance. But it’s important to keep in mind, with options you need more than upside and downside price targets. You also need to plan the time frame for each exit.

Remember: Options are a decaying asset. And that rate of decay accelerates as your expiration date approaches. So if you’re long a call or put and the move you predicted doesn’t happen within the time period expected, get out and move on to the next trade. Time decay doesn’t always have to hurt you, of course. When you

sell options without owning them, you’re putting time decay to work for you. In other words, you’re successful if time decay erodes the option’s price, and you get to keep the premium received for the sale. But keep in mind this premium is your maximum profit if you’re short a call or put. The flipside is that you are exposed to potentially substantial risk if the trade goes awry.

The bottom line is: You must have a plan to get out of any trade no matter what kind of play you’re running, or whether it’s a winner or a loser. I have seen way too many traders not get out soon enough on profitable trades because they got greedy, or stay way too long in losers because they’re hoping the trade will move back in their favor.

WHAT IF YOU GET OUT TOO EARLY AND LEAVE SOME UPSIDE

ON THE TABLE?

This is the classic trader’s worry, and it’s often used as a rationale for not sticking with an original plan. Here’s the best counterargument I can think of: What if you profit more consistently, reduce your incidence of losses, and sleep better at night?

Trading with a plan helps you establish more successful patterns of trading and keeps your worries more in check. Sure, trading can be exciting, but it’s not about one-hit wonders. And it shouldn’t be about getting ulcers from worry, either. So make your plan in advance, and then stick to it like super glue.

Happy Trading!!!

Cheers.