Trade Management – A Consideration (Part 2)

Last week I wrote up a consideration for trade management with the intention of helping you learn perspective that may help your options trading account in the long run.

It primarily discussed one’s win loss record, but also incorporated discussion about how one can manage their options trading affairs with setting a risk to reward profile – a goal of winning trades being 3 times more profitable than the losses – thus keeping things less stressful in that one doesn’t have to think they always have to win a larger number of trades than losses.

Another key element of options trading’s ‘trade management’ is how much one RISKS per trade in the first place.

Cost as Risk

In last week’s education I asked if you all remember the Cost as Risk education I have provided in the past. I said if you don’t I’d provide it this week – well – here it goes.

Oh, and for those that haven’t heard of this, my goal is to have now educated you on this so you can discuss it with your broker and strongly consider its merits. You can then decide if it is worthy of incorporating consistently in your options trading process, (some even consider it in their investing plans).

There are actually two ways we see one can go about a stop loss.

1. Use a percentage stop loss or 
2. Use one’s Cost as Risk

We teach and use case studies based on a theoretical 25K account in which no more than 2% is at risk on any given trade, meaning no more than $500 risk per trade.

Stop Loss Percentage: If you go with a 50% stop loss rule that means one can set up a trade that costs $1,000 and at a 50% stop one would lose $500 but keep the remaining $500 to live to trade with another day.

Concern with this , well let me ask you. How many times have you stopped out of a trade for a 50% stop only to see the trade turn around and work? Frustrating, right?

A Possible Solution

Cost as Risk: How about spend only up to your acceptable max risk  or up to $500 on the trade to begin with. You will have less contracts and therefore less profit potential, but you will not have an arbitrary stop loss percentage potentially taking you out of a trade too soon if you are willing to risk the full $500.

This way the market and your position’s underlying security can bounce around all it wants and unless its value reaches zero you can maintain the trade and stay in it a bit longer, giving it a chance to work out.

It keeps you from having to over-manage it and all its gyrations as well, so less stress. Less stress in your trading is also a benefit.

Position-Sizing: If your max risk is $500 and the cost of the option is $.50, that would allow one to ‘Open’ ten contracts, equaling $500 total cost of the trade.

Even if the loss on this trade goes to 100% that only makes for a 2% hit to portfolio. This means you can live to trade another day, because you do not have all your eggs in one basket on one trade.

Between a Stop-Loss Percentage or using one’s Cost as Risk, I’d say go with the one that suits your personality best.

Going Forward with Our Alert Services

We may highlight a loss at a 50% stop, or we may look at the max drawdown for the security that has the Money Calendar pattern and if, over the course of the trade, the security goes against the position exceeding that max drawdown we may send an alert to close the trade.

We will continue educating you all through these scenarios as time goes by.

App: Toms Option Tools

Toms Option Tools scan the markets for bullish and bearish trade opportunities using our proprietary scans and strategy algorithms. TTR Darknet finds bullish entries based on triple stack channel collisions. Money Calendar identifies seasonal patterns with at least 90% accuracy looking back 10 years. Weekly Cash Clock finds short term opportunities that last a week on average. Microcurrency Trader applies Darknet technology and moving averages to cryptocurrencies. Velocity Trader utilizes volume spike and Velocity indicators on custom stock lists. Quantum Scripts scans the markets for momentum acceleration signals and employs Quantum noise filters. Optimal Trader finds directional pre-earnings opportunities that are optimized for entry date, stock movement, and volatility surge. My Trades tracks the profit/loss of your trades, displays stock charts and risk graphs, creates new trades, and edits existing trades. Morning Report provides top 10 option rankings in 6 categories each day.

Disclaimers

Stock and options trading has large potential rewards, but also large potential risk.

You must be aware of the risks and be willing to accept them in order to invest in the stock and options market. Do not trade with money you cannot afford to lose.

This is neither an offer to buy/sell/ or recommend a particular stock or option.

Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been actually executed, the results may have under or overcompensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with hindsight.

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