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What does the red phrase below mean?

doougle. 7 points 3 years ago.

This is one of the "not as easy as it sounds" things about options. You always hear things like "Make money if the market goes up down or sideways" or "defined risk trade with an 80% probability". Well, that risk is defined, and it's usually all of your money. They never tell you that part.

Anyway, I think we all struggle with this part. It's hard to have an across the board rule because every trade is a little different. I've let trades go and had them go max loss. I've bailed and seen that it would have recovered.

So I do things to try to stay away from the zone that forces such a decision. For example, $\color{red}{\text{any short strike, no mat[t]er what type of trade, I buy back for .05.}}$ (I put in a GTC order as soon as I put the trade on) This alone has saved me thousands.

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To buy back a short strike is to buy back an option you have sold to the market, thus closing out the position. In this case it would be putting a bid at 5c per contract.

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  • $\begingroup$ To add some colour: Presumably you sold the option for far more than 0.05, and now it has dropped in value to your profit. You are happy. You could wait for the option to expire worthless, or you could close the trade now by bidding for it at the minimum price allowed by the exchange. If you succeed in buying it back you might waste 5 cents but you can sleep more soundly knowing the short option will not "explode in your face" by rising in value again and requiring far more to buy it back later. But you incur a transactions cost by doing this. $\endgroup$ – noob2 May 18 at 15:25

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