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10% Option Portfolio Stop Loss Rule (incomplete)

 
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arthur
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PostPosted: Sun Nov 27, 2005 3:06 pm    Post subject: 10% Option Portfolio Stop Loss Rule (incomplete) Reply with quote

PeakTrader recently created an option portfolio stop loss rule to minimize losses in "irrational" markets. The rule states: If an option portfolio loses 10% of its value, then all options are sold and no trading takes place for a week. This rule was created for difficult trading markets, where a portfolio can lose much or most of its value within a few weeks.

Sometimes, the market doesn't make sense. At the time the 10% rule may be invoked, it may not make sense either, because the rule may take effect when the market is severely overbought or oversold. Nonetheless, an irrational rule may be needed for an irrational market, because each time my portfolio lost 10% of its value, always because of an irrational market, it ended up losing far more than 10%.

Normally, an irrational period takes place roughly once a year. However, an irrational period took place recently not long after the last irrational period. Although, I identified the irrational period before I lost 10%, of my portfolio, I was uncertain if this period would unfold similar to the previous periods.

Over each irrational market period, my portfolio lost 30% to 50% of its value at some point. Fortunately, however, rational periods follow irrational periods, and much of those losses can be recovered quickly. Nonetheless, the 10% stop loss rule may be the most important rule for an option portfolio.
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