Options trading is a smart way to take advantage of the stock market’s price action, as it offers a cheaper way to go long or short while limiting downside risk.
But you may end up losing a good amount of money before you even have time to blink if you invest in options without a game plan.
We’re often asked what separates successful and unsuccessful options traders. And far too often, it comes down to knowing how to manage positions.
Most people spend a lot of time determining when they should get into trades. But figuring out when to exit them is just as important — regardless of whether or not they’re going in our favor.
This seems obvious when a trade moves against us, but it becomes more difficult to remember when we’re sitting on a huge gain.
This psychological dilemma is often called FOMO, or the “fear of missing out.”
Limit Downside Risk by Limiting FOMO
It’s natural to look at a stock and think… “Couldn’t it run just a little bit higher from here?”
And… it could.
But the stock could also fall the next day, wiping out all of the gains we were sitting on. Sometimes, a trader can end up losing all of their money on a play that was way in the black.
And sure, there are stories online of people buying out-of-the-money calls for $1,000, which magically turned into $1 million. But the odds of that happening are few and far between — like hitting the lottery. And it’s not how savvy traders play the long game.
Instead, learn how to manage positions so you can stack the odds of winning in your favor as much as possible.
And remember that paper gains aren’t real gains. Even if we’re sitting on a 200% winner in the portfolio, that trade doesn’t mean anything if we don’t cash out of the position and take that money off the table.
That’s why it’s better to take most winners when we have them instead of letting them ride out to potentially expire worthless.
It’s important to keep in mind that time is not on our side with short-term options trades. We’re playing for a fast move… So when they happen, we want to get out of them just as fast.
And if prices go higher, they go higher.
If we’re convinced that a stock still has room to run — or that it still has room to fall — we can always limit downside risk and close out of that position, rolling those gains into a new trade that takes advantage of that price move.
So the next time we’re sitting on a big gain, remember: Greed is good, but gambling is foolish. Smart traders don’t gamble the returns they’re sitting on today for the potential of more tomorrow.
Instead, take risk off the table and stop making excuses to stay in a position. That’s how veteran traders limit downside risk.
A bird in the hand…
P.S. Between the war, rising interest rates and inflation… we’ve seen the stock market whipsaw accounts day in and day out for months now.
We’re sure a lot of people have seen their gains from the past two years RIPPED away in a matter of weeks…
If that sounds like you… it’s not your fault… and you’re not alone.
That’s why for the first time, Joy of the Trade Head Trader, Jeff Zananiri is revealing his “Heaters” strategy to the public…