It’s been difficult to profit with swing trades (generally 2- to 5-day trades) as of late because of the extreme market volatility. The market swings have been big and many times very unpredictable on a day-to-day basis. Under these circumstances, it might be prudent for option traders to take profits and cut losses quicker than normal. This includes moving up hard and mental stops.

Dialing It Back

When I say “dial it back,” I mean focus on taking smaller profits and limiting yourself on the loss side as well. For example, if you normally look to take a 50% profit, consider taking a 25% or 30% profit instead and moving your stops up to at least break even on the remaining position. The market has been gapping so much and reversing intraday that limiting your gains actually removes risk sooner too. While you can’t profit further on closed positions, you can’t lose any more either. Remember, your main goal as a trader is to preserve your capital and be a risk manager.

Limit Risk

The same thing goes for limiting your losses. Consider smaller contract sizes and risking a smaller percentage on each trade. So instead of risking 50%, perhaps risk 25%. Another course would be to do even less than half your normal contract size and maybe risk a bit more to give the trade some wiggle room in this volatile market. There is nothing more deflating than being stopped out and watching the position profit the same or next day because of tight stops. Of course, how you want to do this is completely up to you. Just consider this a general guideline.

Finally

While the market is never “normal,” there are definitely times when it is more volatile. Now is clearly one of those times, so make sure to wear your risk manager cap and keep a tight leash on your option trades.

John Kmiecik, Market Taker Mentoring