When to Exit a Trade


#1

This question is mostly for Darrell Martin but if any one else can help it would be greatly appreciated. I’m still only in demo but I’m trying to keep it as real as possible. I’m trading like I only have $1500 in the account because that is the amount that I plan on starting with. I will try to average $50 a day in profits. On Friday 2/13 I made 5 trades. They were all successful and I made a net profit of $100.30. However, two of the trades could have turned into big losses. Crude oil was trending up from 8am to 11am. It rose from about $52 to $53.18. It hit a high of $53.43 at 11am which was right about were a +1 deviation level was located. I purchased 2 deep ITM options at the 52 level for a potential profit of $32.74. The options were located at the +.5 deviation level. I also sold 2 options at the $53.60 level for a $15 potential profit. These positions both expired at 2:30 pm. I believe in trading with the trend so I felt strongly that Crude wouldn’t reach my $52 long option and I didn’t think it had enough buying power left in it to reach my short $53.60 option. Market trading dies down between 11 am and 1 pm then picks back up around 1:30pm into the close. I expected a move but I expected a surge up in price but not enough to reach my short option. The market started dropping in price and went all the way down to my long strike of $52. Then it bounced up and started heading higher. There was about 15 minutes left till expiration and I decided to take a $24 profit instead of holding out for the full amount. There was a point were I was down about $160 on this trade which is too much of a draw down but if I took my loss sooner say when the option bid was $40 the loss would still have been too big. The option was deep ITM all day but was still showing a loss because of the bid x ask spread. I purchased each option for $83.63 and I could have sold them at $60 but that would have been a $40 loss which is almost as much as I’m trying to make per day. Plus I felt strongly about my position. Darrell is there a way to avoid these situations? I was really sweating it out and that’s not too much fun. I’ve been demo trading for about two months. My favorite strategy is to buy and sell deep ITM options. I’ve had very few losing trades but when I get a loss it’s usually a pretty big set back. I just don’t know what to do. What would you have done in my position? I have also taken the quick loss only to see the price turn around and head in my direction along with my profits. Also since the profit potential is small usually around $15- $20 I don’t close out early. How do I make these ITM options work?


#2

David, That question is just to general. You need to be post your whole chart and make it up so we have something to reference. We don’t know if you are using min or diagnostic bars. System or strategy or anything other than you doing IIM binaries and making assumptions on where oil is going to move. You just need to give more info.

Scott


#3

Do you set a take profit or let it just expire. Letting it expire is almost always a bad idea. If you have a take profit set, if it hits your profit, you will not be sweating after that what the market does. Do you have an exit order to get out if it reaches your strike? That would help limit your losses.


#4

The option I purchased was very deep in the money and I purchased it for $83.63. As you can see there wasn’t that much profit in it to begin with but my strike was very far from were the market was trading and it was a good bullish day for crude oil so I felt confident that my strike would not be reached. Yes I was planning on holding the option to expiration. Also, even though the option was deep in the money, it was trading at a loss right up until the last 20 min so there wasn’t any profit to take until then. I ended up not holding till expiration and got about half the total profit if I held it. Ih541 is there any sources out there that show how many open orders there are and at what price they are sitting?


#5

Hi David; I am new to all this so forgive me if I sound stupid. But it seems I am in the same boat you are: how can we be trading at a loss when we are ITM from the start? Personally I don’t understand it. You buy or sell ITM from the start yet no profits are materialized until the market moves over or under YOUR selected strike price, regardless if your trade is ITM in relation to Nadex’ offer.

See my images below: 2015-02-19_2210 - Lodester’s library

2015-02-19_2213 - Lodester’s library

The images show I bought above Nadex’ price yet I am losing. Even with the asset continuing to rise I am still losing.

It would be nice if someone could explain this in detail how this is possible.

As for when to exit a trade. I have been doing what you’re doing: monitoring the platform and make a counter trade when the market changes direction.

Not much help I know but maybe this will get the conversation going.

Lode


#6

David, You bought it deep ITM. Binaries 101 states that ITM move very slow. Therefore before you see a profit, you have to overcome your bid/ask spread. Since it moves slow, your P/L will show a small loss for quite some time. Even deep ITM, I would recommend setting a take profit. It will take a long time for the remaining time to tick down to show a profit even if you are ITM, but worth waiting. No sources to show what you are looking for that I know of. As long as your strike stays below the underlying market on a buy, you will eventually hit your profit when the volatility of time is removed from your contract.
Lori


#7

If you need more help understanding this concept David or Lode, come in the pit some evening and give me a shout. I will be happy try to explain further where you can ask real-time questions. Lori


#8

Lode all the trades will start at a loss because of the bid X offer spread. Remember you are buying at the off which is higher and if you were to sell it you are selling at the bid which is lower. The problem I’m having with the binaries is knowing when to take the profit. Many times I’ve bought an option for $80 and won’t see a $15 profit until Maybe less than 10 minuite till expiration. On most of these the option is pretty deep in the money so I usually hold till expiration. I think the only way to grab a quick $20 profit would be to buy an option that’s either closer to the money say a $70 option and then sell it when it’s worth $90. I’m working on this.

As far as the counter trend trades go. It’s a bad habit I have to try and buck the trend by calling tops and bottoms. When I do this I compound my error by taking too large of a position as well. I’m working on it. I think successful trading is a lot about how you handle yourself, discipline and proper behavior not just a system. The trader himself is the most important part of the equation for long term success.

How about you. How are you progressing?