Why Stops Are So Important

It’s all about the timing. Trading options can be exciting but you can’t let emotions get in your way when sticking to a plan. The game is not hard and when I enter trades, I pretty much stick by a few simple rules.

Whenever I place a trade I try to capture a 100% return from my entry price. For example, if I buy 10 options contracts for a $2.00 a contract, my total cost is $2,000. My goal is to double my money to $4,000 and then get out of the trade or scale out gradually. Once the trade is profitable I usually set trailing stops behind the current price and above my entry price. Sometimes you can squeezed out of a trade and not make the profits you want but a profit is a profit.

Also, when I enter a trade, I usually set a 50% stop loss from my entry price. In other words, if I enter the same trade of 10 option contracts at $2.00, then I would close the trade once my capital was down to $1,000.

The market can change some of the perameters of the trading plan but if you can get one 100% winner then you could have two 50% losers and still break even, essentially. Whenever you trade keep a track record of your trades. If you pick 6 out of 10 winners (which is highly possible) and follow the aformentioned guidelines, then it can be easy to grow a “speculative” portfolio.

There were some trades that I profiled last week which did extremely well and Monday I mentioned how to use stops to protect your profits. The casino stocks that rallied last week have traded lower for the majority of this week. Monday I told you to place stops on them and this is precisely why.

Las Vegas Sands (LVS, $8.15, down $3.51) is getting smashed today on concerns that they need to raise more cash. If they are unsuccessful then Las Vegas Sands could be Texas toast. I doubt that will happen but it could.

The point is we found a good entry point, played the rally for a few days, set stops, and got out. We can wait for the same trades again or we can move on to other stocks/ sectors that looked poised to rally or poised to fall lower.

Once you close 50%-75% or even 100% of an original trade which we did after we had massive gains, then the rest is play money to add to your gains and the stops are there to also protect those profits.

Rick Rouse
Rick@OptionsMentoring.com

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