Time stops vs. price stops

The employment report turned out to be a non-event. I did place a early morning order to sell puts on SPY, but got cold feet, and canceled the order. Too bad because it would have been a good trade for the day, as SPY rallied strong after a flat morning.

Anyway back to the subject line, time stops. I am thinking to let my GLD vertical call spread run until Friday 9/18, and then see how it looks. This is using a "time stop" as opposed to the much more common price stop loss. Another commonly used stop is a trailing price stop, to get out if the trade reverses by a certain amount off the high.

The reason for the time stop, is that I think that the action in GLD might get wild and wooly and my usual impulse is to cash in for a small profit, or get whipsawed out (like the last time GLD broke out and went from 70 to 103). The problem with settling for small profits when buying options, is that 66% or more of the trades will tend to be losers. So the 33% winners have to be big winners to make up for the low percentage. I can also use the time stop, because on a vertical spread, the risk is defined, no matter how badly GLD does. Let me caution that a trader will not last long using time stops when risk is unlimited and leveraged (eg: trading futures on full margin).

As for the math of option profits, for example, if a person doubles their money 33% of the time, and loses everything the other 67% of the time, they will lose overall. Basically the person puts up 3 dollars and only wins 2 back. The math is why I usually prefer to sell options and have the odds and time decay work for me, instead of buying options. If a person loses that often, the winners need to be 200% profits to break even.

I signed up for another option seminar. This one by optionseducation.org (link). They also have online tutorials. I am sure some readers have a difficult time understanding some of the option talk. There are a lot of variables. I have always liked options, the complexity suits my mind. I would guess that maybe 5% to 10% of investors have a mind that likes options. I've met any number of investors that can deal with the rest of it, the financial reports, doing research, but are totally bewildered by options. There are not for everyone.

Have a good weekend.

Long GLD, GDX