The other day I sold a 0 dte vertical put on SPX. The defined risk was $2500+ but I want to manage the trade with a max $500 risk. I did this obviously to collect the most premium but still with the same risk. I set a stop loss at $500 which eventually was triggered but spx never dropped below my short strike. It was all IV driven. If I held to expiry I would have made money.
Was considering hedging the IV spikes with cheap VIX calls
I can also roll the options to the next day, in which i could lose more if spx continues to drop or keep the wings to 1 strike away.
Any insights on how to better manage a trade where the defined risk is higher than intended risk?
Posted by GRAYGHOST-370
3 Comments
Options tend to be too volatile for tight stop losses. Better to manage risk in other ways.
It’s a good question. Each approach has drawbacks, so I don’t think there is a perfect choice that works better all the time. Personally, I prefer defined risk only, since I know what I’m getting myself into up front and there aren’t any surprises (with SPX specifically — SPY or other equity options can have expiration surprises). Whereas stop orders can sometimes surprise you if you set them too tightly or too loosely.
That said, I have combined both in exactly the kind of situation you mentioned, like the defined risk is $5000 at expiration but I want to limit losses to only $2500 on an exit before expiration. With mixed results. Like you, I sometimes stopped out too soon.
I saw a bear