1. Stop losses should be between 30 and 40 percent of the purchase price of
the option.
2. Profit targets should be 50 to 100 percent of purchase price of the options.
3. Pick contracts with low I.V. The higher the I.V., the more expensive the
premium.
4. Always close entire position at 80 percent of the maximum profit. Use
http://www.optionsprofitcalculator.com/ to determine profit.
5. If expected move does not happen within a week, close trade to avoid time
decay.
6.As a rule of thumb when a gain on an option position is tweeted out, that is a good opportunity to either close out or begin raising stop levels and start scaling out.
1. Know your exit points, both for a profit and for a loss before entering a
trade. Use the following websites to calculate implied move and profit:
a. MarketChameleon.com
(just change the ticker in bold letters)
b.http://www.optionsprofitcalculator.com/ (complete before a trade)
2. Always check for any upcoming company events, like earnings, before
placing a trade on the company stock or options.
a. Note: If you're buying options explicitly to capture the movement
around earnings, you want as much delta (and gamma)
exposure as possible.
Example: If you plan to hold for just a few days, use ATM options
that are 2-3 weeks out, since that seems a good balance of the
delta, the cost (time premium paid) and the theta decay (based
on the TT studies saying to get out at 22 days to avoid theta
decay).
3. Close half or entire position after hitting a set profit target or a loss target.
a. Important: For earnings plays close half position the next day
at market open, win or lose.
4. Plan exits (see exit points above) before entering a trade.
1. Avoid out-of-the-money options unless implied move indicates the
contrary.
2. Beware of IV crush. If implied volatility is low, buy options. If implied
volatility is high, write options.
3. Avoid options with a large bid/ask spread (no liquidity)
