Today I want to share with you technicals versus position management – which one is more important.
How to look at things if you’re Option Trader?
A lot of option traders when they are getting into trading they’re looking at technicals first. And this is typical because it’s part of the basics of learning to trade stocks.
As you often learn how to chart read, then maybe put on trades, stocks, and then eventually go to options. That’s a quick version of it, of course. As you look to create and manage positions, when it comes to trading options, there’s a lot of things to think about.
And technicals are usually one of the first things people do. That’s because when you go into trading options, you might say you want to buy a call on this stock because it’s probably going to go up.
If you’re doing options trading for premium, meaning for Theta decay or for selling option premium, in that case, the technicals become a little less important. Now technical still have their place.
We even have a membership area where we still look at the charts. The charts are somewhat important as a starting point. But which one is more important?
Is it more critical for you to hone in and focus on the technicals or managing your position? And the big lightbulb moment, of course, is managing your position.
And I’ll share with you why in this post.
Technical Analysis or Position Management
If we take a look at some positions and we take a look at the account that I have, you could evaluate stocks by the charts.
The charts give you an idea of:
- where is the stock going
- how is it moving
- how is it acting
- how is it breathing
If you look at the human breath, you can see the difference when someone has a higher pace (having a heart attack), or is it a calm, slow breath.
Or is it a fast rapid breath like maybe a runner or something like that. That’s what you’re getting out of technicals when you’re trying to manage positions. Or looking at your positions and putting on a trade when it comes to trading options.
You’re looking at the breath. When you see things like this (a pullback) by learning and understanding the technicals, it gives you an idea.
It gives you an idea of:
- is this stock going to go sideways for a while
- is it just going to pause and then continue further lower
- or we’ll just have a temporary pullback here, and eventually, it’ll continue getting higher
That’s what technicals give you an idea of. So that way, when you’re setting up your position when it comes to option trading, ask yourself should I be bullish, bearish somewhat directional on a calendar, or a vertical spread. Or maybe I should be a little more neutral.
The more important thing I would say is managing your position. And if you’re brand-new to trading options take a look at our TradersFly website.
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How to Manage my Position?
Let’s take a look at some of these positions. If I look at the setup for Netflix, you can see I went in it slightly bullish.
And you can see that I did this because we’ve had this nice big bar. And then we’ve had a little pullback. I assumed that this stock would continue on the trend to the upward.
I look at the volume. I look at the price spread and all those things aligned, and that’s my understanding the technicals gave me a possible and potential setup.
That’s a nice solid setup, but what’s more, is the management of this setup. Even if I got the direction of this completely wrong and it started to go against me, do I cut my losses fairly quickly? Or do I continue to add to that position?
And that is way more important. That’s because here you can see I’m somewhat profitable in this position. And this is just a single simple two contract position right here.
If you look at it, it is a diagonal spread probably about 40 days out. And I’m up about $78 on this position, $92 actually for today because Netflix is up about $10. And right now, as this continues, I have Theta that continues to work for me. And these positions working out well.
How do I manage it?
That’s the more important question. If I can lock in, some profits take instead of I got two contracts what if I take one off into strength?
Well, now that $78 that I have right there $40 or so would go in my pocket as profits. And the rest I could now let ride. And if it goes against me, even if I were down $40 on the next single contract, I’d at least be breaking even.
That’s because $40 profit from the first one and a negative 40 from the second contract makes it even. And think of it like a free or scratch trade. And that’s more critical when it comes to these positions.
This trade is going against me. You can see here’s an Amazon calendar, which I set up also as slightly bullish.
You could take a look at this movement right here, thinking this is a nice little setup. It’s popping, but I’m losing a little bit on this position simply due to the volatility.
The volatility is contracting a little bit on this position. It continues to move higher here. And if you look here for the day, even here, but a slight little pullback. But you can see on a week-to-week basis I got in it because we’re looking for some upside.
And this should continue higher. That was my initial technical analysis evaluation. But the problem with this is now the position is starting to profit-wise look like it’s going slightly against me.
I’m down about $123 in this position. $200 for the day, and now what do I do?
Do I focus on the technicals?
Or do I focus on my position?
And at this point, when I have a position already, the technicals are almost irrelevant. That’s because I’m looking at how do I manage the position.
Do I get out and take a loss?
Do I reduce the contracts because here I have three contracts right there? Do I take one off and maybe slow things down. And then add another one later. Or do I move one of these contracts, I take a few off. Let’s say I sell two of them.
And maybe add a single contract to a little bit lower prices. That’s because perhaps the stock will pullback. Or maybe to higher prices. All these are decision making things that you have to go through as you work and play with the position.
I could make some adjustments like this. Or let’s say change this to a calendar – we go to the 1860 or even 1840. And now I made it more directional to the downside.
Or I could pop it more to the upside and say maybe since I’m losing on volatility, I could do something like a 1930 or even 1950. And now I got more of a bullish double calendar double diagonal spread right there. That way, it gives me Delta.
Key Takeaway: You’re managing the position and managing your money based on where the trade is. Based on how the position is behaving and what it’s showing you. Of course, the technicals do give you an idea, but once you have your position on already, managing your position is much more critical than looking at the technicals.
When you look at the technicals, the technicals are more of a good guideline to start things off. And if you’re noticing sideways price action then, of course, you could just do something balanced.
- a balanced calendar
- balanced iron condor
But once you start looking into more directions and things are moving on you, you have to look back at your position, and now how do you manage your money.
The business that you’re in right here is money management and risk management. That’s what it comes down to.
Let’s check out Netflix right here. You can see how do I manage that position. Do I take one under-strength or do I close it out and take my profits. That’s where money management and risk management comes into play. And that’s much more critical than looking back at the technicals.
If we take a look at the Russell, you could see this position is up about $200 or so $150 for the day.
And now I’m looking at:
- Do I let this sit?
- Do I let it continue to keep heading higher?
- Do I take one Butterfly contract off into strength?
The SPX is slightly bullish. But you can see it’s coming in towards the last leg of my position.
If I have three of these contracts, would it be wise to take one of these and be a little more bullish? And take one off into strength and profits and put another contract over here.
That’s what money management is all about. And this is what creates and makes your account more profitable or breaks your account. The technical analysis gives you a nice guideline. But overall, it’s the position and money management and risk management that makes or breaks your account.
I hope you found this post helpful and gave you some insights along with technical analysis or managing your positions when it comes to option trading.
If you find yourself over-analyzing the technicals or just spending so much time on them, don’t stress too much about it.
You probably should dial back. Of course, they are essential, and they do play a huge role in trading, but maybe not as much as you think.
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