Monday, June 22, 2015

Exit Guidelines updated

Taking profit should be the easiest thing in Option Selling, especially in Credit Spread.  You either take the 100% credit through the expiration or you take part of the credit before expiration.  As described in this post "Exit Strategy", I no longer wait till expiration.  I only take part of the credit, mostly at 70% of the credit.

Stopping loss is more difficult, in most trading.  However, it is the most important decision to make, especially in Credit Spread Option Selling when the Risk/Reward ratio of the position is almost 10:1.

The below are some updates/refinement made to my Exit Guidelines, to make it more defined.  Hopefully, taking profit and stopping loss is easier with these guidelines.

Exit Guidelines
1. Take profit
- Delta <= 5 (usually about 70% of credit)
- target profit >= 70% of credit
- target profit >= 50% of credit when Days In Trade is <=5

2. Days To Expiration (DTE)
- 7 < DTE < 14
- exit the position before DTE is less than 1 week (start staring at it when DTE is less than 2 weeks)
- exit with whatever profit or break even if possible, else exit with a small loss

3. Stop Loss
- 25 < Delta < 30 and DTE < 30
- Loss >= 200% of credit and DTE < 30

This is also updated in the Trading Plan.

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