Options 08 · Options
Managing an Options Trade
The part with a clock running
Everything you already know about managing a trade still applies — and one new element arrives that changes the timing of every decision. The position has an expiry date, and doing nothing is not a neutral choice.
Plan the exit before the entry
Decide three things before the order goes in: where you take profit, where the thesis is dead, and the date by which the trade should have worked. The third one is new, and it is the one people leave blank.
A time stop is as legitimate as a price stop. If your setup was supposed to resolve within three days and it is day four with nothing happening, the thesis has quietly failed even though the stock has not hit any level. Theta has been charging you for those four days regardless.
Calculator
Risk and reward
Entry, stop and target — and the win rate you would need for the trade to be worth repeating. Works for shares and for options.
Taking profit
Options move fast, and the temptation to hold a winner into a bigger winner is stronger here than anywhere else in trading, because the percentage gains are large enough to feel like they should keep going.
- Sell the contract rather than exercising. Exercising throws away every cent of remaining extrinsic value.
- Scaling out works well on options. Take part of the position off at a defined multiple and let the rest run with the risk already recovered.
- Watch the calendar as much as the price. A winning position in the last week before expiration is being taxed heavily by decay, and giving back a good gain to time is a miserable and entirely avoidable way to lose.
- Recognise the gap between the gold and grey lines in the payoff widget. It is real money, and it is only available while time remains.
When it goes wrong
Two failure modes, and they need different responses. The stock hit your invalidation — the thesis is wrong, close it, and the loss is the loss. Or the stock has done nothing at all, in which case the thesis is not wrong yet, but it is running out of runway and being charged rent for the privilege.
The last week
Decay accelerates sharply into expiration and gamma makes the daily swings wilder. A contract in its final days can move 40% on a move that barely registers on the stock chart, in either direction.
Unless you are deliberately trading that effect, the simplest discipline is to be out before the final week. Roll to a further expiration if the thesis is intact, or close and take the result — but do not hold a decaying contract into its worst period because you are hoping for one more day.