Monthly Cash Machine Newsletter, Wednesday, 03/02/2005 12:01:31 PM ET
Spreads Strategy Q&A
HAVING TROUBLE PRINTING?
I have been following the MCM for a few weeks now and I like the strategy, but I need a little help with the closing trades. Specifically, I have three plays that could be closed for small profits and I don't know whether to leave them open until the options expire. What's the rule of thumb for taking profits in this kind of trade?
Regarding position management with spreads:
Learning to correctly manage portfolio positions; maximizing gains while limiting losses, is one of the most important aspects of successful trading. The first thing a trader should realize is that they should never enter a position without a pre-planned exit strategy. The reason for this approach is simple: the most common reason for losing money in the options market is failing to close a position in a timely manner, regardless of whether the action is to limit losses or lock-in gains. A surprising number of traders achieve excellent profits, but end up giving most (or all) of it back simply because they don't develop a sensible plan to manage each position. As far as closing plays early, there are many occasions when a position will yield a favorable profit far in advance of its expiration and learning to take advantage of those situations is an important part of becoming a profitable trader. I am sure there are some "rules of thumb" but for conservative traders, any time a position offers a profit similar to the initial target gain (based on ROI/time), it should be considered an early-exit candidate.
In short, the key to success with a strategy such as selling (OTM) credit spreads is the position management that follows the initial trade and in all cases, you should remember the adage, "Traders become successful when they learn to take small profits regularly and they don't let losing plays significantly erode capital."