Does the mindset of the option trader take into account time held and thus the annualized rate of return on a position?
If a seasoned trading made a small return, but in a very short period of time, would he close his position having made a very nice annualized return?
As I have continued to learn about options trading, I haven't seen any mention of annualized returns. In so much other investing, we look at annualized returns quite a lot to make comparisons to other opportunities in order to determine our best use of capital.
Perhaps annualized return is something an option trader looks at on a portfolio level or at the end of the year. Perhaps it's not really a thing for the options universe.
Posted by pbemea
2 Comments
I don’t pay attention to this, but some may.
The question I would be asking is if the stock has moved favorably to close for a quick gain and if it might pull back to lose some or all of the gain?
Is the analysis the stock may keep moving in the favorable direction, or might it retrace? This is the more important question IMO.
Something I’ve posted about is taking what the market is giving. We cannot dictate returns but can only gain what the market and our risk tolerance will allow.
New traders tend to focus on profits and may not realize how much risk they are taking. Experienced traders tend to focus on risk and are willing to take more profitable, but lower profit trades. Remember that every losing trade will have to have multiple winning trades to get the account back to even. Many experienced traders prefer a lot of small lower risk winning trades than a few higher risk trades that may have bigger returns.
I do. Many do as well. A classic example is to close positions early if your position moves a lot in one day or one week, like selling options 45DTE, but the underlying moves a lot and you make 30% profit in a week, most would close the position. It’s more micro than stocks but macro, ie returns, is what counts