Today I will start risk management and end with risk management. As a trader, risk management is the most important attribute you have. It is what will make you successful and will also ruin you if you choose to avoid it.
Markets are up this morning after the China bailed out Evergrande and it’s clear that there will not be contagion risk since China will not allow one firm to destabilize its economy.
After this correction, a couple of my positions ended up in the money or breached. Instead of rolling them down and out at a very high cost, I chose to roll them out to a later expiration and up 10 points. That allowed me to buy time at essentially no cost. I did that because the market patterns that we have had over the past year has been shallow corrections due to the Fed intervention. This correction was 5% and not the normal 2.5% to 3% do to the fear of the China Evergrande contagion concerns.
I chose to roll my trades in that manner because the probability of a Fed tapering announcement diminished due to the slowing economy and lower inflation fears. I may be wrong and the market may go lower today but I am not at all worried with my positions. The worse case is that I close those positions for a max loss and would recover in two to three months.
The reason my recovery would be short is because I do not place large positions based on my account size and I spread my positions out into multiple expiration dates. What I will do if the market goes down today is push those threatened positions out and up a couple of months until the market recovers and moves beyond the higher strikes. It would cost me very little except for the lowering my buying power. That is not a problem since I do not use more than 60% of my account value at any one time and I would increase it for a short time so I can trade as I normally do.
So bottom line is that my focus is completely on risk management and the profits work themselves out in the end. Trading with a plan is critical if you want to be a successful trader.
Founder | SimpleOptionStrategies.com
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