Tuesday, August 21, 2012

lost trading weekly options

lessons to learn

1. After 2 days of rally the AAPL share closed at 665. In the morning it opened at 674. There was tremendous volatility in the options and the weekly option ITM I bought was 665 for 11 dollars. The main problem was I did not put a stop loss immediately. This is a horrible mistake when it comes to options especially.

There was selling and profit booking and the stock came down within 2 hrs to around 660 then came down to a low of 650 and closed at 656.

This was my first option trade after a long time and I was not cautious. Options can burn you if you do not have a stop loss especially when it is so volatile after 2 days of rally.

It is advisable not to buy any weekly after 2 days of rally because it is already highly priced because of high volatility. Then the options expire in 2 more days. Now I have to take loss because the options closed at  4 dollars. I got a loss of  700 per contract. Any way I had only 2 contracts and I put a sell limit on it at 6 dollars on it. hopefully the stock move up tomorrow and I can get some of the losses back.

weeklys are good when the rally starts but can be overpriced after 2 or 3 days of rally. I think it is not worth buying it at that time.

A good idea would be to sell weekly far out of money and make a lot of money. that is the easiest thing to do for extra cash.

There should always be atleast a 25 percent stop loss on options or a 500 dollar limit. To lose more than that is not worth it. These are very important for money management.

I also bought a next month option at the same strike price but it declined only 15 percent. This is because weeklys are very volatile and decay fast with time.

graph for 3 days

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