Getting out of a contract
So, you’re trading options now. Great stuff, Money Makers! But you still have lots of questions. I understand, I’ve been there. One of the early question I always had was this: When should I get out of (or “close,” to use more accurate terminology) a contract? The answer, like many answers in day trading, isn’t so simple. It’s really up to each individual. But ultimately, each individual should weigh three things: Your personal style of trading, your comfort level with risk, and market conditions.
First, what’s your personal style of trading? Are you one of my Patreon members, where you see all of my trades, precisely when I make them, and then you make the exact same puts to open at the exact same times? Or do you watch my daily live trading videos strictly for entertainment value, and your style is completely different? Perhaps you want to ride out a contract longer than I do, maybe for the entire week. There’s no right or wrong way to do it! As you’ve seen, I’ve done pretty well with my own style, but that doesn’t mean that I always will, and it certainly doesn’t mean that you can’t do better!
To be sure, part of a trader’s style is going to be driven by your comfort level with risk. A good rule to follow is this: Set a goal for each contract in advance, and then close when you reach your goal. Maybe your goal is a pre-established percentage you’d like to hit? Maybe it’s an actual dollar value? (If you had 10 contracts, which equates to 1,000 shares of stock, and you ended up hitting a goal of 10 cents, then that’s $1,000 in profit, free and clear.) However, on the flipside, you’ll want to set a loss threshold for yourself, too, and close early if you reach that first. How big your profit goal is and how big your loss threshold is will ultimately define your own personal risk level, and that’s a good thing. It’s much better to partake in trading with relatively firm boundaries for yourself; that way, you never delve into the truly unexpected, which can be quite scary if you’re in loss territory.
Through all of this, though, you really do still need to consider market conditions, since, depending on those conditions, and how things are going in a given day, it might sometimes make sense to stretch your pre-established boundaries just a little – that’s why I said “relatively” firm, and not “absolutely” firm.” If you’re not a bit flexible, you could miss out on some additional profits by not waiting longer, or you could save yourself from some additional losses by not closing sooner. Positive and negative news can go a long way in a short period of time.
So, do yourself a favor, and think about these factors before you trade. Your overall feelings on the underlying stock should never be ignored – style of trade, risk level, and reaction to market conditions are all in your own hands. I’m here as a guide, if you truly want to trade exactly how I do, but at the end of the day, the decision is yours, and yours alone.