Holding Until Tomorrow Rarely Works

In the second half of my blog yesterday, I discussed buying Verizon call options when I realized the shares were at a short term floor. Yesterday I also noticed that JP Morgan was at a short term ceiling at $114. I bought put options on JP Morgan yesterday for just under .60 on 10 113 July 5th expiration. I didn't sell when I should have when the options were trading for .85. Instead I held the options over night while JP Morgan closed at $113.80 on Tuesday.

This week is a shortened trading week with the markets closing at 1pm on Wednesday in celebration This is why I title my blog "Day Trading with Options." Don't hold options that expire in the same week over night because you will be disappointed more times than profitable.

for Independence Day on Thursday. The US markets will reopen on Friday, but holding options long that expire this week is investing suicide and here is why... Those 113 put options closed Tuesday at .47 while the stock closes slightly up at 113.80. On Wednesday, JP Morgan opened near 113.20 and those put options went down to .32. I did not panic and decided to wait and target a selling point near yesterday's high. I placed my limit order to sell at .80 and it got hit while JP Morgan stock price dropped to $112.30. Not only was the option out of the money yesterday when it traded for .85, it was 1.20 higher than where my options sold today.

Typically, you may buy back the same options you  had the prior day at a lower cost even if the stock moves in the direction of expectation due to the loss of time until expiration. 

This brings me to my 2nd point of the day... Many times we sell at the right time and made a profit for the day and we are looking for something else to buy. This is one of the biggest things that hold back traders from staying profitable on the daily basis. At the time we sell, it doesn't mean that the stock you were following is going to reverse position and it doesn't mean that something else is going to reverse position. When a trader does this, they typically are not buying at the right time and set themselves up to take a loss. Then because we got in at the wrong time, many traders will hold this losing position too long. Stops must be in place to exit when the trade isn't going your way.

Don't buy something right after taking a profit.

And finally, I realized something else yesterday when looking for the right selling point to take a profit in your option trade. You can use a similar method to find the right entry point to buy your option contracts. Typically, I like to look for options that I can double my money in one day based on the same stock movement for the day. You can actually look at the high price of the option that you are looking to buy and base your entry point far below as much as half. This way if you enter at the right spot, you can expect to exit at a profitable spot.