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Best Practices

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Best Practices

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

When trading options, you’re able to manage your risk on order entry. We are able to trade liquid products, enter at the price we choose and take the desired amount of risk. However after order entry, the only thing that we can control is when we will exit our trades.

Today, Tom Sosnoff and Tony Battista take a look at all of our different exit strategies. At anytime in a trade, there are three aspects we should always consider: the value of the option (relative to our basis), the time remaining until expiration, and the percentage of profit relative to the time we have held the trade.

Next, they look at examples of when we would or would not exit a trade. When exiting a trade, we look to see if it has reached our desired max profit, if our assumption has changed on the underlying, if we are now one day before or after a binary event, or when expiration is approaching. When discussing trades we would not typically exit, Tom and Tony cover three main situations: the first category is defined risk trades where the loss is near its maximum possible. The second category is trades that are being tested early on (we don’t exit these trades but instead allow the probabilities to work out). Lastly, we don’t look to exits that are “on the dance floor” at expiration.

Another core concept covered in this segment is rolling trades. We look to roll trades when we are extending duration while maintaining a directional stance on an underlying. We also may roll spreads where the underlying is between the strikes or futures that we wish to carry into the next cycle.

The guys also go over the tastytrade profit target of 50% and where to find it on the dough platform. They go on to look at optimal exits for strangles given a % of max profit in a certain number of days.

Last but not least, Tom and Tony discuss the importance of trading during liquid times for the market to ensure optimal fills for our trades.

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