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Eye on Education: How to simplify trade Management
3 min read

Eye on Education: How to simplify trade Management

Eye on Education: How to simplify trade Management

Summary

Using the expected move and updated metrics of the potential for max-loss, max-gain, breakeven and value at expiration allows you to look at your position with the same fresh eyes as when you first entered it. This will help inform how your risk/reward has changed versus your current profit and loss and help decide when is a good time to exit. (to take gains or cut losses)

Deeper Dive

Below is a chart showing a profitable call spread in WORK, taken this morning, and approaching expiration next Friday. You can see the price entered, and the current price (at the time this morning) and current profits. Below the chart, we can see updated metrics, the probability of profit (of it staying above the red to green breakeven line) its probability of max gain (above the green to white line) and its probability of max loss (below the red to white line).

The last line, "If stock expired here" is what this trade would be worth of we time traveled to expiration with the stock unchanged. In this case, the current value is 4.32. If the stock expired here it would be worth 5.36. That means this call spread, originally long premium, with time working against it, is actually reversed now. The longer the stock stays here, the more it will be worth. Decay is now on its side:

Key

  • Original: Your original trade price and cost
  • Current: Current trade price and value
  • Change: Profit or loss from entry
  • Prob of Profit: The probability assigned by current options of the trade breaking-even (stock level in parentheses)
  • Prob of Max Gain: The probability assigned by current options of the trade making its maximum profit (stock level in parentheses)
  • Prob of Max Loss: The probability assigned by the options market of the trade making its maximum profit (stock level in parentheses)

Actionable Insights

An open position, and its current gains or losses, can quickly be compared to the updated metrics to determine if the new risk/reward profile is worth staying in the trade. The updated expected move visualization gives an intuitive perspective of what a normal move higher or lower would further do to the trade between now and expiration. The "If stock expired here" line gives an immediate sense of decay's (theta) either positive or negative effect on the trade in the remaining time until expiration.

However, everything needs to be balanced versus what could happen, and the expected move is helpful here as its indicating that most of the profits could be lost if the stock goes down in line with expectations in the next week (the bearish consensus line gets nearly to breakeven in the trade if stock were to go lower). And that's exactly what happened with today's big selloff.

The trade is still a winner, but barely, and the current value is now almost equal to the "if stock expired here" value. Because the probability of a max gain was only 44% this morning, and the trade could only make another dollar or so versus what was at risk (the current profits) if the stock declined in line with its expected move over the next week, profits should have been taken. The fact that that bearish expected move happened in just a few hours drives home that point.

See a part of OptionsAI technology with your own price target and demo trades in AAPL HERE

Previously:

Actionable Insights from the Options Market

Earnings event expected moves
Unusual activity alerts
Spread trade education

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