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Defending Against Large Moves in Options

Market Measures

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

The term, “slump” is often referred to in the realm of sports like baseball or golf, but it can also be applied to trading. Today, Tom and Tony talk about how they try their best to avoid consecutive losses in their trading accounts relative to a specific underlying market or strategy.

The show kicks off with a brief conversation concerning "memorylessness" in the market and stocks’ tendency to not exhibit abnormally large moves right after a large move. This is great news for options traders who trade from the short side, as we profit from the market not moving. So the fact that the market tends not to move after it moves a lot is helpful in reducing consecutive losses.

The guys then look to short Strangles and a study for further information:

The Study The Results

We found that managing profits significantly reduced our chances of losses piling up in short options trades. That is, taking some quick winners after a loss has been very helpful in reducing the number of losses that can occur in a row.

View the above segment for greater clarification on defending against multiple losing options trades.

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