Options certainly require extra tweaking. Generally, I prefer to buy one expensive option instead of several cheap ones because doing so is much less risky. Minimizing risk is my priority. I have a lot of confidence in my target prices and I let profits run wild as long as my target prices are not reached, so profits take care of themselves and all I have to do is â tactically speaking â minimize risk. The only exception to this rule (buying one expensive option instead of several cheapos) in my journal is when I bought 8 YM options and that was because I had a very high degree of confidence about the probability of an eminent jump in stock prices.
My oil and bond options are in bad shape right now because they donât have any intrinsic value left but the remaining time to expiration is somewhat generous. Iâm keeping them because Iâm confident that if thereâs any big move in oil or bonds, it will be on the upside and generate a profit while the likely loss on the other option will be smaller than the profit. If for instance markets donât move enough by expiration time, I will loose everything invested in those options, which is a loss from which the portfolio can recover and a risk I will be forced to take while my portfolio is still too small to be optimally fragmented. My decision to keep the options is mainly based on a need for consistent behavior:
Are the assumptions behind my original decision still valid? If so, maintain position unless the potential loss became to great.