1. Stop losses should be between 40 and 50 percent of the purchase price of the option.
2. Profit targets should be 50 to 100 percent of purchase price of the options.
3. Trade size and stop size are two components of your risk management.
4. Always close entire position at 80 percent of the maximum profit. Use http://www.optionsprofitcalculator.com/ to determine profit.
5. If expected move does not happen within a week, close trade to avoid time decay.
6. As a rule of thumb when a gain on an option position is tweeted out, that is a good opportunity to either close out or begin raising stop levels and start scaling out.
7. Your minimum loss on any trade should not exceed 5% of your account size.
8. Take profits as they come. Unrealized profits and no profit and potential loss mean THE SAME. 25%-30% gain should be locked, and other parts of profits can be locked at technical levels of your own choice with stop break even. Once a trade hits 25% plus gain, then never let a trade go red.
1. Know your exit points, both for a profit and for a loss before entering a trade. Use the following websites to calculate implied move and profit:
(just change the ticker in bold letters)
b.http://www.optionsprofitcalculator.com/ (complete before a trade)
2. Always check for any upcoming company events, like earnings, before placing a trade on the company stock or options. a. Note: If you're buying options explicitly to capture the movement around earnings, you want as much delta (and gamma) exposure as possible. Example: If you plan to hold for just a few days, use ATM options that are 2-3 weeks out, since that seems a good balance of the delta, the cost (time premium paid) and the theta decay (based on the TT studies saying to get out at 22 days to avoid theta decay).
3. Close half or entire position after hitting a set profit target or a loss target. a. Important: For earnings plays close half position the next day at market open, win or lose.
4. Plan exits (see exit points above) before entering a trade.
1. Avoid out-of-the-money options unless implied move indicates the contrary.
2. Beware of IV crush. If implied volatility is low, buy options. If implied volatility is high, write options.
3. Avoid options with a large bid/ask spread (no liquidity)