Managing Losses on Option Spreads

It is easy to ignore the losing side when trading spreads. Especially when trading out of the money credit spreads and are winning 80+% of the time. But unless a trader can manage their risk they will eventually lose all of their money. This goes with credit spreads as well. So it is important to have some sort of stop which allows you to exit out of your position whenever you experience a loss. There are two different methods that can be very helpful when limiting your loss. 1. Stops on the Options If you sell an option you can always have a stop on the option to buy it back. So if you sold the spread and made $2 you might want to exit out at a pre determined point. For instance if you lose $2 or $3 it could signal a time to get out and run. 2. Stop on Stock You could also put a stop order for the stock. So if you sell an option you can say, “if the stop drops to a predetermined level I will exit it for a small loss.” This can work well the only problem is that you do not know exactly how much you can expect to lose. So what is better? That really depends on the individual trader. Some traders might feel more comfortable knowing exactly how much they can lose while others may feel like they stand a better chance of predicting the stock, then managing their option. From my experience it is so important to have some level which you decide to cut your losses and move on. For more on credit spreads or other option spreads visit http://www.stocks-simplified.com/Option_Spreads.htmlrn