Traders spend a large part of their learning time studying ways to choose stocks and options, hoping to find a trade that will provide solid profits. However, traders tend to spend little time learning how to set up exits and sticking to these exit points. Many new traders find that they are picking good options to trade, but that gains fade quickly and what once was a positive trade has turned negative. This is not what we want to happen, so let’s discuss some ways to choose exit points ahead of entering a trade.

You’ll often hear me say that we need to know our exit before enter and that we should plan our trade and trade our plan. These might seem like trite statements, but they are very important. Too many traders enter a trade without a plan and this leaves them lost and unable to choose an exit point. Optionetics wants to teach traders to trade with the least amount of risk possible, while maintaining strong profits. Thus, we need to choose trades that can provide profits without taking on a lot of risk. This is why we are so against selling naked options, as the reward just isn’t worth the risk.

When looking at a possible trade, always create a risk graph. This will provide insight to where the stock needs to move to become profitable and to reach your predetermined profit goal. If your goal is to achieve a 100 percent profit on a given trade, but not to lose more than 50 percent, you need to make sure this is possible given you outlook for the stock. Don’t just enter a trade hoping it will move your way, have a reason why you expect the stock to do so.

The biggest detriment to successful trading is emotion. If you don’t have a preset exit point, your emotions will run wild and it will be very difficult to pull the trigger to sell. When an option is profitable, a trader tends to feel it will go higher. At the same time, as the option loses money, many traders will hold on hoping for a rebound, though the option often ends up worthless.

Set your exit points in advance, both a profit exit and a stop loss exit. This doesn’t mean you have to enter a stop and limit order with your broker, but have this mental stop ready to go so it won’t be an emotional decision when the time arises to make a move.


Jody Osborne
Senior Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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