Trade Risk Management Tutorial

What can I do on this page?

The raw trades we show are not managed in regard to risk management. The trades are held until our target is achieved or the option expires. This is not the best method of managing the trade, but it does allow for maximum time in trade and creates the database we use on this trade management page.

Using the inputs above, you can select you own approach to trade management, and see how the system performs.

Below is an explanation of each input you can adjust.

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Trade Types

Start by clicking the type of trade you would like to analysis.

Straddle - buy a call and put with same strike and month
Strangle - buy a call and put with call strike > put strike and months same
Call Backspread - sell call and buy greater number of calls at a higher strike in same month
Put Backspread - sell put and buy greater number of puts at a lower strike in same month
Call Ratio Spread - buy call and sell greater number of calls at a higher strike in same month
Put Ratio Spread - buy put and sell greater number of puts at a lower strike in same month

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Trade Management Parameters

The top field will change depending on the type of trade chosen.

• Percent Profit - this category applies to Straddles and Strangles. Enter the percent profit you want to target. This is how it is calculated.
  Percent Profit = 100*Profit/Cost of Position
• Percent Credit Retain - this category applies to Backspreads. A backspread is always entered with a credit. Enter the percent of that credit you want to retain when the position is closed.
  Percent Credit Retain = 100*(Closing Credit)/(Entry Credit)
• Percent Max Profit - this category applies to Ratio Spreads. A ratio spread has a maximum profit point at the strike of the sold options. Enter the percent of that maximum profit you want to capture when the position is closed.
  Percent Max Profit = 100*(Closing Credit)/Max Profit

Percent Stop-Loss - this input is available for Straddle and Strangle trades. This is a percent of trade cost you are willing to put at risk. If this level is exceeded, then the trade is closed at a loss of this percentage. If you set this to 100% or greater, then the trade will be carried to expiration or closed at your percent profit point.

Max Risk - Enter the total amount you a welling to risk on the trade. On straddles and strangles, this is the maximum cost of the trade. On Backspreads, it is the maximum risk you will accept and occurs at the strike price of the long options. On Ratio Spreads, it is the level of loss at which the trade is closed.

Probability Level - Each night when we evaluate possible positions, we calculate the probability of achieving some target. For straddle and strangle trades, these targets are 20%, 50%, 100% and 200% profit. It is 20%, 50%, 100% and 200% of entry credit retained for backspread. On ratio spreads it is 25%, 50%, 75% and 99% of maximum profit to capture. By selecting one of the levels, you can screen the trades based on the calculated probabilities in our database. The value limit of that probability is input in the next field.

Min Probability - in reference to the above input, enter the minimum percent probability you want to consider. On all the trades in our database, the lowest Probability Level will have at least a 90% probability. Refer to the Trading System Tutorial page for complete explanation of these probability calculations. This input allows you to be more selective in trades to analyze

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Time Management

Use these inputs to manage trades based to number of trading days in the trade.

None - no timing management will be used

After ___ days in trade. - enter the number of days in trade after which the following conditions are considered.

Immediate Bail-out - if this is selected, the trade is closed after the number of days entered above.

Bail-out Break-even - after the number of days entered above, the trade is tested each day as to whether it is at breakeven or has a profit. The trade is closed as soon as the trade is at breakeven or better.

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