Although “greed is good” is a famous line from a movie, in real life as an option trader greed is not good. One of the biggest regrets and mistakes I hear from option traders is that they are going for profit targets that are too big, especially for debit positions. Consider this a quick reminder to decrease your overly high expectations.

What Is Good?

I generally go for 20% to 25% of either the cost or the max profit for a debit position. That is my first risk removal profit taking target. If I have several contracts on, I go for some bigger profit targets. But what I see all too often is option traders going for 50% or more as their first profit target. Would I like to hit that every time? I sure would, but it is impossible to do so on a regular basis. Obviously, 25% is a lot less than 75%. But it’s not only about taking a profit; it is also about removing risk.

Risk Removal

I always like to say, “you are a risk manager first.” Everything else takes a backseat as a trader. Clearly, you can’t profit when you remove risk, but you also can’t lose or give back gains. This is what I like to focus on with my student traders. Besides, 20% to 25% is a pretty good return. You won’t get that from most financial products, will you?

Finally

Curb your expectations for big profits on every trade. It is just not possible. Instead, focus on solid gains and take that dreaded risk off the table sooner rather than later. You will be glad you did, I promise.

John Kmiecik, Market Taker Mentoring