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| | Five Pro Tips for Stop Losses on Options and Stocks | | Karim Rahemtulla, Head Fundamental Tactician, Monument Traders Alliance |  | Many variables can affect your trades. These five stop loss ideas can help you limit losses while leaving room for the upside. |
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| | | There is no such thing as an easy answer to using stop losses when it comes to options - especially short-term options. It's tough to nail them down.
Short-term options are subject to a variety of different factors, including...
- Strike price
- Time decay
- Volatility
- Liquidity
- News.
That's a lot of variables that can affect your trade.
You can mitigate some factors, but you can't eliminate them.
If you place a narrow stop loss - let's say 25% - on the option, you are better off not trading short-term options. You can see that move in an hour well before expiration.
If you set a wider 50% stop loss, you stand to lose 50% of your money in a trade - that's no fun either.
Here are some tips to figure out how to set a stop loss that you can live with... and determine which stop loss method works for you and the type of trade you are in.
1. Start With Position Sizing
In other words, before you jump into a trade, allocate how much you will put into the trade. Then, allocate how much of that you are willing to lose. That will determine your stop loss - forget percentages, use real dollars. This is one way of keepin' it real.
2. Check the Charts
Now, I am not a technical analyst, but we have a bunch of them in The War Room who are happy to help! Use short-term charts for short-term plays. Find the support and resistance points. Usually, there are more than one of each. Decide which support level you think is critical. When that level is breached, you sell.
3. Study the Greeks (Not the People)
Time is critical. If you ignore it, you will get hammered. To figure out how to know what time does to your options, you need to understand the two Greek symbols commonly used in investing.
Theta measures the rate of decline in the value of an option due to the passage of time, also known as time decay. In a vacuum, an option loses value as it moves closer to its maturity.
Delta is the change in the value of the option based on the change in the underlying share price. If the option has a delta of $0.05, that means the value of the option AT THAT TIME will move up or down $0.05 for every move up or down of $1 - and fractions thereof - in the stock.
The Greeks are dynamic and not static, so what is true at 10:30 a.m. may not be true at 10:45 a.m.
So you must stay on top of them. Stop-loss setting - as I said earlier - is not easy. I hope you are getting that message. It requires diligence.
4. Watch Share Movement
Set the stop loss based on the movement of the underlying shares. It can work, but even a small move in the shares can result in losing a ton of your option premium. That's because there is no time decay associated with the stock - the Greeks don't matter when you own stocks. It's a strategy that will allow you to preserve some capital, at best.
5. Pick a Standard and Stick to It
I use a standard 25% stop loss, based on position sizing. I will put no more than 4% of my portfolio in any given stock. That applies across sectors as well. Having two gold stocks does not lessen my exposure to the sector - it doubles it.
Using this system, I am risking 1% of my entire portfolio if any particular trade goes against me. If I gave 25 positions at 4% for 100%, my maximum loss would be 25% if all the positions hit their stop loss. I will LOSE money, but I will limit my losses.
You cannot be a successful investor if you don't look to risk as well as return. Most people focus only on return.
Action Plan: In The War Room, we discuss position sizing, stop losses and many other strategies on a regular basis. Join us now and get in on the next discussion and profitable play!
Yours in smart speculation, |  | Karim Rahemtulla, Head Fundamental Tactician
Monument Traders Alliance | | | | Recent War Room Winners | | NCLH | | 7/15/2021 | | 82.14% | | RCL | | 7/15/2021 | | 15.51% | | AMGN | | 7/15/2021 | | 14.81% | | MU | | 7/14/2021 | | 8.3% | | STLD | | 7/12/2021 | | 22.55% | | Biggest War Room Winners | | BG | | 5/26/2020 | | 320% | | DIS | | 10/13/2020 | | 198.81% | | FDX | | 9/18/2019 | | 188.49% | | NUGT | | 8/17/2020 | | 179.31% | | BIIB | | 6/7/2021 | | 175.31% | | Fastest War Room Winners | | LMND | | (4 minutes)
12/7/2020 | | 36.67% | | ROKU | | (4 minutes)
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| | | | WAR Room Testimonials | | | |  | coach July 16, 2021 at 10:37 a.m.
In @ .17 x2. Closed 1 position @ .20 = 0.03/17.6 % | | | |
| | | |  | Chiemi M July 16, 2021, 10:33 a.m.
I closed the 50 Shares/Contracts I opened at $.18 for $.21. Thank you, George! | | | |
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