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With the very low premiums I don't use a mental stop like 100% because it is too easy to hit that stop. I just evaluate the fundamentals and the reason the trade is going against me and decide whether to hold or to dump.
I traded at OX for 2 years before I asked about a lower rate. Because of my volume and track record of not getting margin calls at OX they were willing to give me the lower rate. You need to build up a history with them before you can expect a lower rate.
I did get that lower rate before Schwab bought them.
My short Oct SB 16 puts expire today. I put them on 5/9/12 for 0.10. OX was charging $330 margin then. I put $660 more excess on for that trade. Futures were at 20.79.
On June 4th futures dropped to 19.29. The premium on that option moved up to 0.19. The OX margin on that day was $440.
The premium moving up caused a $100.80 loss in my account balance. The margin moved up $110. But the $660 excess I kept per contract when I put on the trade covered the $210 needed to keep the position on and kept me from getting a margin call and allowed me to ride out the market moving against me.
On Sep 6th futures were down to 18.87. But since the options was so close to expiring the premium did not go higher.
Today the options will expire at zero. That's a $112 profit, minus fees, per contract.
This is an example to show that even if you put on a position and the market moves somewhat against you, if you have enough excess you can ride out that movement and have a profitable trade. With the excess I had on I could have rode out an even larger move against me.
Of course if the market is moving against you because something fundamental changes, then bailing out on the position would be the smart thing to do. That is where experience comes in to know when to hold 'em and when to fold 'em. And even then you still will occasionally do the wrong thing. But the further out of the money your strikes are the safer your position.
Hi ron, is there a danger that by the time you are aware of fundamental changes ie they get reported in the news sources you use, a bigger move may have occurred and you were unable to make the decision to bail?
I suppose what I am trying to ask is how many of your early exit decisions are made through pure intuition (gained from experience) and how many by dissemination of market information/news (also obviously gained through experience)?
I sold Jan 13 2000 Soybean Calls on friday at 18 7/8 ($943.75) and today they closed at 10 ($500). 4% limit down move in futures and my premium nearly halved after 1 day.
