Here’s part of my
investment
philosophy:
When initiating a new position most investors
recognize the importance
of placing a trade they believe will produce a
profit. When you are satisfied with both the reward
potential and possible loss for a given position,
then you are within your
comfort zone.
It's important to remain within your comfort
one as the trade
progresses. This is a
point many traders miss. They believe: if the
position is acceptable when opened, it's okay to
wait for the options to expire. When the position
becomes riskier and losses begin to accumulate, the
position may have moved beyond your comfort zone
boundaries. If that happens, reduce size, exit, or
otherwise adjust the position.
This can
happen when:
- The spread
becomes very profitable and there is little
potential profit
remaining. When holding the position until
expiration can only earn a small additional
profit, the reward potential is too small to
take the risk of holding.
- The underlying
stock makes an unfavorable move and the position
is in danger of incurring a
substantial loss. When that potential loss
is more than you can afford (or are willing) to
lose, then holding and hoping is not a wise way
to play. Cut risk to get back within the zone.
Comfort zone
boundaries should be flexible as you gain
experience. Flexible does
not mean 'anything goes.' For example, bullish
strategies
such as writing covered calls may make you
uncomfortable (for good reason) when
the market is bearish and you may prefer to trade a
strategy that is more market neutral. Thus, it’s a
good idea to be aware of alternative strategies,
even with
no immediate intention of using any of them. They
become part of your
arsenal of useful trading tools.
Mark D Wolfinger
Expiring Monthly: The Option Traders Journal
http://www.expiringmonthly.com/