Pro tip: Look at the exit from another angle


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Continuing our series on Know your trade , let's take a look at the exit strategy of your trade from another angle.
Image courtesy Flickr user artemuestra:
Many non-professional traders and investors sit at home in front of the computer screens and panic when a trade moves against them or get nervous about when to exit a winning trade.

It was the hardest emotion for me to overcome when I first started out trading. I left an environment of a corporate office where I could bounce ideas off people and seek advice; and although I can bounce a ball off my dog's head, he's no help in exit advice.

I quickly adopted a rule from my old corporate days, when I would take a day off and leave someone else in charge: I'd say to them any questions, "ask yourself what would Rich do?" It was perfect back then and I still use the concept today.

Simply ask yourself "would I enter the trade here at current levels?" It typically provides the smartest/safest decision every time.

Let's work through an example for illustration purposes.

In this example we sold a secured OTM VIP ( quote ) May 13 Put at $0.85 two weeks ago when VIP was trading above $13. Today the position has moved against us when VIP fell like rock and the price is now trading below $11 a share placing the PUTs ITM and selling for $1.85. That's -1.00 against the position.

Now ask yourself "would I enter this position here at current market levels?"  The answer is most likely NO! So close the position.

Let's reverse the example and say the price of VIP rockets up, and the PUT options are far out of the money and are now valued at $0.05. Ask yourself "would I sell these puts at the current level at 0.05 cents?" The answer should be NO! Close the position, take the money and run!

This is a great guide that can serve traders well, but it's not a shortcut or excuse not to have a trading plan!

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks

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