The 3 Best Ways to Manage Your Option Selling Risk

  1. Maybe I’m over-cautious but I have been using 150% Rule for Premium Risk Mgnt.
    Do you think that is too tight?

    • Michael Gross Says:
      November 1, 2017 at 1:57 pm

      Jim,

      I think you have to go with what you are most comfortable with. We advise the 200% rule because it gives the option value some room to move without stopping out too soon. Personally, 150% would be a little tight for me. But for the very risk averse, 150% could make sense. You will have to expect, however, to be stopped out much more. Remember, even most of the options that stop out at 200% will still expire worthless.

      I hope that helps.

      Regards,
      Michael

  2. What do you do if your stop is triggered ??
    Do you buy back your short option and sell a further out option to make up for some of that loss ??

    • Michael Gross Says:
      June 9, 2017 at 2:01 pm

      Dear Blasher,

      Potentially, yes. You close out your position for sure. Whether you roll it or not depends on market fundamentals, where the underlying price is, et. I recommend watching the video on “Executing the Roll” which is located on the “Video Lessons” page of our website, or consulting chapter 12 of our book, The Complete Guide to Option Selling, 3rd Edition.

      Thanks and hope that helps.

      Regards,
      Michael

      • Thanks! I just received your book in the mail today. What quick processing .. 2-days !!
        I can’t wait to devour the book.
        Thanks for all you do.

  3. Hi Michael.

    I sold $40 Oil August Puts earlier in the year and whilst I am still nowhere near my premium based stop loss level (actually still in profit), I am beginning to get concerned with the recent breakdown in the Oil price (currently $45.50). How do you guys manage such a scenario? Thanks Jon.

    • Michael Gross Says:
      June 8, 2017 at 2:18 pm

      Jon,

      First and foremost, if you have read our commentary for the last 3 months, you would likely be selling calls 🙂 . That being said, we recommend the 200% rule for individual investors. If the option doubles in premium value, exit.

      I hope that helps.

      Regards,
      Michael

      • Hi Michael.

        Thanks for the reply. I have actually been selling strangles in Oil and have found it generally to be a great cash cow! And yes I do use your 200% rule however in the current Oil scenario I currently find myself in, I fear that my position will be in the money long before the 200% S/L is hit? So my question is do you guys also use a price based percentage exit risk e.g. in the case of $40 Oil Puts a 10% price based exit point would mean I buy back my Puts if the price reaches $44? Thanks again Jon.

      • Michael Gross Says:
        June 8, 2017 at 2:33 pm

        Jon,

        Yes, you can use this method. This is described in the article. We use technical points of support or resistance as examples in the article. But you can set any price point on the underlying as an exit point.

        I hope that helps.

        Thanks,
        Michael

  4. D. Wayne Glass Says:
    June 6, 2017 at 7:54 pm

    Hey Michael, what timely lesson on managing risks because I was just working on my trade escape plans for bad trades. I like your 200% guideline for trades that go bad pretty much right after I put them on. Short of putting more money at risk there’s not much can be done about these. But after a position has a chance to realize some theta and is actually showing a gain, I revert to a 100% guideline. If a trade “gives back” the original premium collected as well as any appreciation thus far and has a basically zero value, I close the trade (for as close as possible to a scratch.) Nothing I hate worse than letting a winner turn into a loser. Really curious what you think of this approach.
    Thanks

    • Michael Gross Says:
      June 8, 2017 at 2:10 pm

      Wayne,

      It sounds like we are talking about the same thing. The 200% rule states that if an option doubles in (premium) value from the point at which you sold it, you exit. That sounds like what you are doing. Its not perfect but it should keep you out of trouble when selling option premium.

      I hope that helps.

      Thanks,
      Michael

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