What's your time stop strategy for long front month call/put if the underlying moves sideways? Is the battle pretty much over once the option is down 50%?
Time stop for long front month option?
- Thread starter turkeyneck
- Start date
The battle is never over until the option expires or you close the position.
A stop is an individual and arbitrary decision. You place it where you can live with the result.
If the option has decayed 50%, it's usually going to be close to expiration (if IV and price haven't changed much). That's worth trying to hang in there a bit longer since that's the sweet spot of fast decay.
If it's due to price and/or IV as well, then there's usually more time remaining and with those, sometimes I'll convert some of them (I'm assuming they're naked) to calendars since the far month might cost the same or less. If it reverses, take the long gain or add more naked shorts. It all depends on your comfort zone.
The best thing to do is to take the profit AND find another one that does better for the remaining time until exp.
A stop is an individual and arbitrary decision. You place it where you can live with the result.
If the option has decayed 50%, it's usually going to be close to expiration (if IV and price haven't changed much). That's worth trying to hang in there a bit longer since that's the sweet spot of fast decay.
If it's due to price and/or IV as well, then there's usually more time remaining and with those, sometimes I'll convert some of them (I'm assuming they're naked) to calendars since the far month might cost the same or less. If it reverses, take the long gain or add more naked shorts. It all depends on your comfort zone.
The best thing to do is to take the profit AND find another one that does better for the remaining time until exp.
To the OP - the battle isn't over if the option declines 50%. It's better to recover 50% than 0%. Trust me I've learned this lesson the hard way (yes multiple times!). I strongly suggest you not trade the front month unless your holding period is less than 5 trading days otherwise theta will increase exponentially. This link shows it in visual form.
http://optionalpha.com/option-theta-definition-and-time-decay-chart-8914.html
Re spindr's suggestion to just hold on if you've already lost 50% - again I've thought the exact same thing and found that has negative expectancy. So many times I've said to myself "it would've been so much better to exit with a loss (even a large one) than hold on HOPING for either a much smaller loss/breakeven/profit".
Re spindr's suggestion to convert to calendar/adjust position - my advice is to simply exit. If you are W-R-O-N-G get out - period.
Disclaimer: Not trying to pick on spindr just offering an alternate view point. This is a very important subject so I hope we can all learn from each other.
http://optionalpha.com/option-theta-definition-and-time-decay-chart-8914.html
Re spindr's suggestion to just hold on if you've already lost 50% - again I've thought the exact same thing and found that has negative expectancy. So many times I've said to myself "it would've been so much better to exit with a loss (even a large one) than hold on HOPING for either a much smaller loss/breakeven/profit".
Re spindr's suggestion to convert to calendar/adjust position - my advice is to simply exit. If you are W-R-O-N-G get out - period.
Disclaimer: Not trying to pick on spindr just offering an alternate view point. This is a very important subject so I hope we can all learn from each other.
I normally don't put any stop on this kind of trade, but before i setup this trade, i have decided what is the actual amount money that i am willing to loss, let said 0.5% of my account, i will then long those front month option until end - it either turn up to be loser or winner in the end..
Closing when it loss 50% will cause you more money - commision and slippage.
Closing when it loss 50% will cause you more money - commision and slippage.
I'm long CVX Jun 110 Call. I initiated the position a month ago @ 2.6. Now it's only worth 0.4 (-85%). It still has 1 month to go. Is it foolish to take loss now or the battle is not really over until it's over?
rmorse
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My trading strategy has always been simple. As long as I'm within my risk tolerance, I reevaluate every position in an on going fashion. I Ignore my cost of a position, and say to myself, if I had no position, would I put this on now? If the answer is no, then I get out. If I'm not sure, I cut back. If I still like it, even more now, and I'm comfortable with the added risk, I add to the position.
I Manage my risk, re-evaluate position, ignore my cost, up or down, it's only worth what it's trading at now.