As options traders, we spend a considerable amount of time researching and planning our entry points. But what about exits? I see so many traders who focus on when to get in and forget to focus on when to exit, it's important to remember that successful trading isn't just about perfect entries – it's also about knowing when and how to exit a trade. At Good Kids Trading (GKT), we believe in trading small, trading often, and trading mechanically, and exit strategies play a vital role in our approach. So, let's dive into the importance of exits in options trading and how they can make or break your trades.
First, it's essential to recognize that options trading is different from trading shares. Options move differently than the price of the stock. Options expire so the length of time on your options and the volatility of the options you are trading matters. Market conditions change rapidly, and having a well-defined exit strategy allows you to adapt and react quickly. By establishing your exit criteria before entering a trade, you can minimize the impact of emotions and avoid making impulsive decisions that could lead to losses.
There are several exit strategies to consider when trading options, and each comes with its own set of advantages and challenges. Here are a few popular strategies to help you optimize your exits:
Profit targets: Set a predetermined profit level at which you'll close your trade. This helps you lock in profits and avoid holding onto a trade for too long, only to see potential gains evaporate. GKT traders often target a certain percentage such as 50% and set GTC orders.
Stop losses: Stop losses on options are a little different than shares. As previously mentioned options might trade more exaggerated than the shares so it's possible you can get stopped out then you watch the trade hit the target without you. Establish a maximum loss threshold at which you'll close your trade. If you setup trades that have a small debit you may not even need a stop! See my article on trading without stops.
Time-based exits: Close your trade at a predetermined time, regardless of profit or loss. This can be particularly useful when trading options with time decay, as it ensures you don't hold onto a losing trade for too long. GKT is a proponent of closing many of our trades within 21 DTE, but depending on the strategy we may trade closer dated options.
Technical indicators: Use technical analysis tools to identify exit signals, such as trend reversals or support and resistance levels.
Option Greeks: Monitor option Greeks, like Delta, Theta, and Vega, to determine when it's time to exit based on changes in the option's risk profile.
Now that I've discussed various exit strategies here are some ideas to incorporate exits into your options trading plan:
Plan your exit strategy before entering a trade: I can't stress this enough know when you are going to get out for a profit AND for a loss! By establishing your exit criteria upfront, you'll be better prepared to manage risk and make informed decisions during the trade.
Stay disciplined: Stick to your exit plan, even when emotions run high. Remember, consistency is key when it comes to successful options trading. Follow your plan, edit it later, but don't let emotions dictate your exit.
Monitor your trades closely: Keep an eye on market conditions, option Greeks, and any other relevant factors that could influence your exit decision.
Be flexible: While discipline is essential, it's also crucial to remain adaptable. If market conditions change or new information emerges, be prepared to adjust your exit strategy accordingly. For me personally if there is ever mention of accounting issues, I always exit the trade.
Learn from your exits: Analyze your trade exits to identify patterns and areas for improvement. Use this information to refine your exit strategies and optimize future trades.
To recap: it's not just about entries – exits can make or break your trades. Keep risk to reward in mind by giving equal attention to both entries and exits for all your trading strategies, you'll be better equipped to navigate the dynamic world of options trading. Remember, at GKT, we believe in trading small, trading often, and trading mechanically, and a well-defined exit strategy is a critical component of our success.
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