Thursday, March 31, 2016

When to Skedaddle

skedaddle (verb.)

1. To move or run away quickly.

Etymology19th century US. Probably an alteration of British dialect scaddle ‎(to run off in a fright), from the adjective scaddle ‎(wild, timid, skittish), from Middle English scathelskadylle ‎(harmful, fierce, wild).

Synonyms: Flee, vamoose, Scat, take off, make tracks, get lost, high tail

Whether a trader decides to skedaddle, vamoose, or high tail it out of Dodge, the skill behind the words is part of the core of successful trading

Hang on to a position too long -- "It has got to get better, right?" -- and the losses continue to mount as hope flees until, at last, the dread day of reckoning comes, in my case usually when the options expire on a sad, useless losing position that ought to have disappeared long ago.

For winning trades, getting out is easy. I have set a somewhat arbitrary rule that when the profit has reached 50% of its maximum potential or greater, I take the profits and use them for other trades.

Exiting a losing trade is far more ambiguous. There are no objective criteria. The reason for entering the position is in the past and all I'm left with is the buzzing confusion of short-term trends and daily movements that tend to obscure more than they illuminate.

And there's that pesky creature called Hope, the innate human  tendency to hang on in the unfounded expectation that things will improve.

I must confess, that I have never had a really good rule for telling me when it's time to skedaddle from a losing positions.

It's a problem. It needs mending. And so I shall do.

Beginning today I intend to exit any position where the loss is 1.5 times the premium I received or greater. For example, if the premium is 50 cents a share, then the the 1.5 times mark would be $1.25 (75 cents more than the 50 cent premium).

The calculation is to take the premium, multiply it by 1.5 and then add it to the premium in order to get the loss price for the options.

It may be that 1.5 times premium will be too early, leading me to miss many reversals. Or perhaps it will be too late, needlessly increasing my losses. I'll adjust the rule based on my experience.

-- Tim Bovee, Portland, Oregon, March 31, 2016


Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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