Question regarding selling puts for premium

[masudhossain]

So when selling puts to collect premium, your Risk:Reward ratio is outstandingly different. Sometimes you're risking 100 to make 1. http://prntscr.com/7cvgx5 for example you're risking a max loss of $5927 and a max reward of $23 (2 standard deviation trade).

A max loss at this capacity will most likely wipe out someones capital, so how does traders manage losing trades? Do they simply exit the trade once they are negative a certain amount of money? Because i remember watching Tastytrades and they were saying how you shouldn't ever need to manage a trade after entering. Is a max loss in this case literally IMPOSSIBLE to happen?

Me personally, i find this trade WAY too damn risky to NOT manage it somehow. I would have to have literally a 100% percentage to be profitable, and one max loss will wipe me out completely. So, reddit, how would you manage this if it was a losing trade? When would you go 'okay, this is going to fail. It's time to exit'.

 

[rmorse]

Selling OTM options is not appropriate for everyone. However, when you compare risk/reward you have to include expectancy. The low reward that comes with selling short term OTM options benefits from the frequency that you win. And yes, you have to have an exit strategy for when it does not work. I feel this strategy works better with broad based indexes than individual equities. You are less prone to new events.

 

[OTM-Options]

So how does traders manage losing trades? Do they simply exit the trade once they are negative a certain amount of money?

Easier planned before the trade is opened than actually carried out. The after-hour market is most likely when a trade suddenly goes south - and much further than your planned exit. Also the urge to hang on to a losing trade hoping for a rebound is very strong with options, one day your stop loss has been hit, the next day you're up 50%.

Because i remember watching Tastytrades and they were saying how you shouldn't ever need to manage a trade after entering.

I agree ..... Micro managing a position is no good. Enter trades with the assumption of maximum loss and be OK with it.

 

[Xenomorph]

IMO there is no safe way to trade options. There is no safe way to buy options. There is no safe way to sell options. There is no safe way to buy or sell options spreads. No matter which game you play you have to guess 3 separate things correctly; direction, distance, and duration (time). Compare this to simple stock trading where 'all' you have to guess is direction (not so easy) and you can see how the deck is stacked against you with options. People love to claim that options have 'limited risk'. Oh, sure. If you just buy one or two contracts. But that's not how people trade. The temptation to load up on as many contracts as you can buy or sell is ever present and it's only a matter of time before a trader succumbs to the temptation at the worst possible moment and gets wiped out. Most options traders have been completely wiped out on several occasions, taking their accounts to absolute zero. Many of those later claim to have 'learned their lessons' but they haven't. If they are still fooling with options they will be wiped out again. Are there exceptions? A few. But very, very, very few.

 

[naija]

If you are having to constantly monitor your credit trades, then I would venture out to say your strategy is not on solid ground. Majority of my trades are weekly credit spreads and I don't sit in front my computer monitoring my trades every minute. I set alerts, where if the underlying price of a certain stock reaches a certain threshold (which I subjectively define), then that's when I start monitoring my trade.

Also, if the risk/reward you're using is similar to the examples you gave, then I believe you need to rethink the RoI % you should be earning. A 1% ROI or 3% is extremely small; and who knows, that RoI might not be what you take home, as you might still have to pay commission for the trade.

 

[Autodidact]

IMO there is no safe way to trade options. There is no safe way to buy options. There is no safe way to sell options. There is no safe way to buy or sell options spreads. No matter which game you play you have to guess 3 separate things correctly; direction, distance, and duration (time). Compare this to simple stock trading where 'all' you have to guess is direction (not so easy) and you can see how the deck is stacked against you with options. People love to claim that options have 'limited risk'. Oh, sure. If you just buy one or two contracts. But that's not how people trade. The temptation to load up on as many contracts as you can buy or sell is ever present and it's only a matter of time before a trader succumbs to the temptation at the worst possible moment and gets wiped out. Most options traders have been completely wiped out on several occasions, taking their accounts to absolute zero. Many of those later claim to have 'learned their lessons' but they haven't. If they are still fooling with options they will be wiped out again. Are there exceptions? A few. But very, very, very few.

Or maybe, just maybe, you and the people you know never really figured out a positive expectancy trading system using options and you generalizing.

Similar to Marketsurfer and his lack of value for charts.

 

[rmorse]

IMO there is no safe way to trade options. There is no safe way to buy options. There is no safe way to sell options. There is no safe way to buy or sell options spreads. No matter which game you play you have to guess 3 separate things correctly; direction, distance, and duration (time). Compare this to simple stock trading where 'all' you have to guess is direction (not so easy) and you can see how the deck is stacked against you with options. People love to claim that options have 'limited risk'. Oh, sure. If you just buy one or two contracts. But that's not how people trade. The temptation to load up on as many contracts as you can buy or sell is ever present and it's only a matter of time before a trader succumbs to the temptation at the worst possible moment and gets wiped out. Most options traders have been completely wiped out on several occasions, taking their accounts to absolute zero. Many of those later claim to have 'learned their lessons' but they haven't. If they are still fooling with options they will be wiped out again. Are there exceptions? A few. But very, very, very few.

No doubt that options are more complex than just a decision on the underlying. However that complexity provides opportunity. Trading is about looking for risk adjusted opportunities and taking advantage of them.

 

[Xenomorph]

Or maybe, just maybe, you and the people you know never really figured out a positive expectancy trading system using options and you generalizing.

Similar to Marketsurfer and his lack of value for charts.

Let's hope you don't blow out your account. My guess is that you have and that you will again.

 

[Autodidact]

Let's hope you don't blow out your account. My guess is that you have and that you will again.

Read again what you said, you said there is no safe way to trade options, a ridiculous statement.

Now, you guessing I'm an irresponsible trader because I don't agree with you, another ridiculous statement.

You got a third one coming ?

 

[Xenomorph]

Read again what you said, you said there is no safe way to trade options, a ridiculous statement.

Now, you guessing I'm an irresponsible trader because I don't agree with you, another ridiculous statement.

You got a third one coming ?

No. What I said is the only way to trade options safely is to severely limit the number of contacts you gamble with. But... the reality is nobody does this. It's only a matter of time before an options trader gambles with too many contracts at the wrong time.