Here is another friendly reminder for option traders: Don’t be greedy! If you haven’t noticed, the market has been and continues to be very volatile. The only way you might not have noticed is if you were not trading. That said, sometimes not trading is also the smartest thing to do. I have repeated that mantra several times in the past as well. I have said over the past couple of months that I believe this market has been difficult for swing traders (generally two- to five-day trades) to make money because of the volatility.

I have also said that a market like this can produce some bad habits. Many option traders have gotten away with not timing their entries properly because many stocks have just been moving higher. But one thing that I have always said and will continue to say is it might be prudent to take profits and cut losses quicker than normal under circumstances like this. I generally do this anyway, but many option traders shoot for “too much” of a profit.

So, what does this mean and what should you consider? To me this means looking for smaller profits and limiting yourself on the loss side too. For example, if you normally look to take a 50% profit, maybe consider taking 25% or 30% (I have been doing 20% for my first profit exit) instead. The market has been gapping so much that limiting your gains actually removes risk a whole lot sooner. Remember, your main goal as a trader is to preserve your capital and be a risk manager first.

The same thing goes for limiting your losses. Consider smaller contract size and risking a smaller percentage on each trade. So instead of risking 25%, consider 15%. Or do fewer contracts and maybe 50% stop losses. Of course, how you want to do this is completely up to you, but do some experimenting and write it in your trading plan. You don’t have a trading plan? Well, that is a conversation for another day!

As I frequently say, the market is never “normal,” but there are times when it is more volatile. This has been and continues to be one of those times, so it may be a good time to strap your risk manager cap just a little tighter and batten down the hatches even more.

John Kmiecik, Market Taker Mentoring