Why Most Lose Money Following Unusual Option Activity

BY Joshua Belanger | March 8, 2021 

Trading options can be rewarding...

But they are also risky and challenging to learn.

Most gurus or talking heads make it seem easy, but it's not.

Most professionals don't even know how to trade options consistently.

Take it from a former professional who lost every penny I had on my first options trade.

Here's the truth about options: they are inefficient.

When you're right, you make more than you should. When you're wrong, you lose less than you should.

But understanding that inefficiency and how to exploit it is how to win the game of options trading.

For instance, the backtested Hot Money Trader signals my system generates has shown that around 65% of the signals go above 25% at some time.

What’s more is that around 30% of the time, those gains reach triple digits.

The problem, however, is that if you don’t take those wins before they turn into losses, those stats don’t help at all.

Likewise, the 40% that don’t turn into 25% gains or more can sometimes drop into significant losses if not caught in time.

One of the most valuable lessons I learned is that every great idea doesn’t necessarily turn into a 100% winner.

When an option position falls, limiting losses can make or break your whole portfolio.

Early on, I realized that just letting a position to continue falling to 0% does more harm than watching a winning position soar does good.

How to Avoid Letting Losses Destroy Your Gains

Any good system, whether built around stocks or options, involves limiting losses.

This is effectively done by using stops and keeping a strict exit strategy no matter what direction the trade heads.

Many target a specific percentage for both gains and losses.

For instance, more conservative approaches might demand that if a loss grows to 30% or so, it’s time to exit and just take the loss.

After all, losing $3 out of every $10 on a trade is painful. But it’s not nearly as painful as losing all $10.

The same goes for winners. Set clear goals.

If you enter a traded based on some specific indicator or movement like unusual option activity, make sure you don’t sit too long on it.

Often, that indicator will quickly change. Expecting a 25% or 50% movement in a matter of hours or days is one thing. Taking those gains off the table when they occur is another.

Trading options doesn’t have to be an all-day thing. You don’t necessarily need to sit in front of your screen watching every uptick and downtick in price.

But remaining active and vigilant makes a world of difference.

Earning The Right To Take A Profit

This is a mindset I learned as a runner on the floor of the Chicago Mercantile Exchange, watching the most successful traders.

Earning the right to take a profit is following your system and managing your risk.

When your targets are reached, act.

That applies to both winners and losers. If you are able to identify winners more than 60% of the time and both lock those gains in while limiting your losses, you’re going to create consistency and likely come out ahead.

And that’s the whole point of this.

You’re not likely reading this just to brag at a party that you found a 300% gain.

You are likely interested in growing your account, living an easier life, buying what you want when you want.

Keeping an exit strategy like this is crucial to achieving any of those things.

That’s not to say that you won’t walk away with a few 300% winners.

In fact, because of how the options market can move based on overnight information, you might even wake up to gains like that from time to time.

But overshooting a profit target isn’t the problem. Not having such a strategy in place is.

My proprietary system I use in Hot Money Trader includes just such a strategy.

It’s how I’ve been able to lock in gains from that track record I mentioned above.

But even non-Hot Money Trader subscribers need to keep this in mind.

Creating a preplanned exit strategy that both locks in gains and limits losses is just as important as studying the ins-and-outs of unusual option activity indicators.

And the best way to learn this habit is to follow someone such as myself because it's not easy to stick with a system during draw down.

But that's the exact time you must stick to the system to help navigate through the negative thoughts and emotions.

Here's to living rich,

Joshua M. Belanger

Joshua M. Belanger

Joshua Belanger is the editor of Hot Money Trader and Wealthy Tech Investor. After leaving Wall Street on his own terms, Joshua has been providing ordinary investors blockbuster returns since 2008. In 2018, the average return of Hot Money Trader beat the markets by over 15%.
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