I took a couple of weeks off from trading and now I’m trying to do this from a fresh perspective. Even writing notes as if I were new. So I’m testing momentum scalps and decided that I needed to figure out why I keep getting $10-$20 gains…and $30-$40 losses. Aside from needing to get better at knowing when -not- to take trades I noticed that I may not have been choosing the best strikes for the situation. The following is copied from my notes. It’s fairly obvious stuff yet I was somehow missing some of it. In short - something clicked into place for me. Let me know if I’m right or wrong with this?
ITM (In the Money = *Above strike) OTM (Out of the Money = *Below strike) ATM (At the Money = Close to strike) *Reverse if selling/going short
If trading OTM: -Try to get around $20-$30 binary -Typically only going to do this type of trade if the market is expected to move quickly. The longer an OTM trade stays against the strike, even if it moves in the traders favor, the higher risk of if turning into a loss. For example, price could move a fair amount in favor. P/L (Profit/Loss) in the positive. Then it slows down and oscillates below the strike. The P/L could easily drop back down into the negatives. -Great potential for gains. Need to know why the trade is being taken. Is the price expected to move quickly? Or is the trader expecting a lot of movement before the strike’s expiration?
If trading ITM: -Considering that the price can move against the strike position and still gain, still need to be mindful of where exits are in relation to strike. In the case of momentum scalps, have found that it’s safer to be far enough from the strike so that the stop loss is not on the opposite side. Case in point: Took two long entries. Price slowed down and began oscillating. One’s stop loss was above the strike, the other below. One mostly stayed positive, the other mostly negative. Eventually the first one hit its target and exited for a $19 gain. The second nearly hit, but the price reversed direction and ended up with a $43 loss. Had the first trade hit its stop, which it nearly did, the loss would have likely been less than half of what the other trade saw. -Still possible to lose money even if the market moves in favor. Example: Earlier got into a trade for $77.50. Price movement slowed down, nearly hit stop, then eventually moved back in favor. Hit take profit exit, price ended at $78. Might have been a better idea to trail/move stop up and stay in the trade instead. Does not seem to be a typical situation.
Summary OTM: Expect either quick movements or holding it long enough with expectations of larger movements. ITM: Careful selection of strike is important. If stop allows for the price to go too far OTM, could cause significant loss. ATM: Can be a relatively safe choice, just don’t do it late in a trend. Need a better understanding of how P/L plays out with this, and what the ideal situations are for using.
-Ty