Not having an Exit Plan
Greed and fear are 2 factors that drive most of the transactions in the Stock market. This is true not only for Options but also for Equities. Whenever you enter into a trade, you should set your expectation and have the exit strategy on both side – Booking the profit and Stop Loss strategy
Planning the exit is not only about limiting your loss but also setting the profit target on upside and getting out of trade once the target is achieved. This is one of the most important strategy and most of the successful traders have discipline around their trades. Also, there should be a timeframe for exit. In terms of Options, some traders exit a week before expiration while some wait till the last day. You should set the expectation before you enter into the trade- I will close the positions if the value of the Option goes up by x% or if it goes down by y%.
Did you get out at the right time?
This questions most of the traders ask themselves is “Did I get out of trade at the right time? “
The answer is “There is no best time to get out of trade”. At least you don’t know till you have seen the future. I am not sure how many among the readers have time machine to look in future. I hope none. The time when you as a trader feel is right time to exit is the best time. If you get out of trade and the stock moves up, don’t worry. You were disciplined, you had set up a target and you followed the plan you have set
What to do to avoid this?
“Never regret the trade that you have made in the past?”
It is easier said than done but this is the policy you should follow in the trading. True for both Stock and Options trade. The old trades should surely be analyzed to see if you had done sufficient analyzed before getting in and getting out of trade.
Whether you are buying or selling options, an exit plan is a must. Set up the profit target in advance and be ready to get out of positions when the target it reached. If you reach your upside goals, clear your position and take your profits. Even if the goal is reached before you were expecting, get out of trade. Also set the max loss that you can tolerate on the trade and put a stop loss at that price. If you reach your downside stop-loss, once again you should clear your position. We are averse to booking loss but my experience says, most of the time (not always) where I did not put the stop loss, I lost the complete money in Options.
Options have time value and most of the time you will have some value of the Option even if it is out of money. You may like to encash that at least and limit your loss.
I have lost more when I have broken my rules than when I have followed the rules. I understand, it is too difficult to stick to the plan and Greed takes over you and you hold the position more than you have planned. I don’t say you are always going to make loss when you do so. But you will never know when you should get out and may end up in complete loss of premium.
