Best Practices

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Trade Mechanics: Opening and Closing Trades

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 opening a trade the first thing you need to do is choose something with high liquidity. The dough platform has liquidity rankings to help with this process.

You also want to trade options on stocks with an implied volatility rank (IVR) of 50 or higher, and a time frame of 25-50 days to expiration (DTE). Next, make sure the trade fits your directional risk tolerance from a beta weighted delta perspective.

Use limit orders, and not market orders at order entry. Allow enough time to get filled at the midpoint or close to it and don’t get caught up in short term swings. Have a target profit percentage for managing winning trades.

When selling options in the form of Straddles or Strangles, the higher the delta of the strikes, the quicker you will want to manage the trade. See “Straddle/Strangle Theory and Practice”, a Skinny on Options Data Science from December 3rd, 2015, for the reasoning.

When closing trades you should manage your winners when the profit target is achieved. Use limit orders to avoid slippage and be patient, just like when opening the trade. Keep your Gamma Risk in check by not waiting to expiration before closing a trade. A graph of a 50 Delta Straddle was displayed to drive home the importance of this point.

Watch this segment of “Best Practices” with Tom Sosnoff and Tony Battista for the valuable takeaways and an explanation of our checklist for entering and exiting trades.

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