Don’t Be a Dick for a Tick: How to Optimize Your Options Trading

BY ON November 9,2020

If you have not heard of, or memorized this phrase, it’s time to do so. Don’t be a dick for a tick is all about not losing money because you tried to make that extra $5 on a contract. I usually think of options trading when I envision not trying to get that extra tick of profit. But it holds true for nearly all and any type of trading. Perhaps with the exception to scalp trading, of course. But my focus here is not about scalp trading – it’s about directional trading.

The definition, in short, means take your exits and don’t try to squeeze $1 or $5 out of a trade. Just get out and move on, profitable or not. Otherwise, you are going to risk price going in the wrong direction than you want and, more importantly, you’re risking spending significantly more time trying to exit your trade when you don’t get that extra $1. Remember, time is money. So what is the cost of $1 equated to your time? Did you spend more time cost than the cost of $1?

Usually, this is about exits, but it applies to entries as well.

Study Your Entry and Time Your Exit

So you have a trade. It’s an amazing trade. The day is starting out. You just KNOW this is the trade of the day. Maybe the week. Perhaps even the month or year.

The indicators all line up. There’s a daily squeeze. We are above the exponential moving average 21. Point of control is higher. We’re moving towards a low volume area. Whatever your indicators may be are all perfect.

The bell rings. Ding ding ding. The price chops for a few minutes, and that’s fine. You want the dust to settle in the first ten minutes. A minute passes. Five minutes. Nine minutes. You’re ready with your fingers on the keyboard to get that entry. Ten minutes. It’s time.

You hit the order button and… nothing happens. Your order is pending. Ten seconds go by. The price moved up 10 cents. A minute. The price is now up 13 cents. Three minutes. The price just shot up $1. You start to get nervous. You quickly change your order to market and fill with some crazy slippage. But you’re in.

Maybe you still profit. Maybe you don’t. But what went wrong? It was PERFECT. You planned to even take a little bit of profit selling some shares/contracts after a $1 price rise. But you missed the initial move. Was it an options trade and you just lost $100 per contract on that $1 move? Was it the futures market and you missed out on the good, beginning chunk of profit? What happened?

Where You Went Wrong

You were a dick for a tick. You could have put your initial order in a tick above the ask (one price movement) and you almost certainly would have been filled.

Now, I’m not saying throw market orders at your trade as slippage could get problematic. Unless you know the symbol you’re buying well and it’s a non-issue. Side note: always keep an eye on big events that can move prices quickly such as non-farm payroll announcements, FED interest rate announcements, etc.

But had you put your order in for just above the price you wanted, even as a limit order, you probably would have gotten filled on the ask, not the extra tick. But even if you didn’t, you would have been filled. And that’s the key. What was the cost of not getting filled? Better yet, let’s talk about exits.

When to Leave the Party

So you’re already in the trade you want. You are profitable. You made money. Fantastic! But now it’s time to exit. You put your order in and wait. And suddenly, the price goes the wrong way. Your $1,000 profitable trade is now $995… $990…. $900…. $860. You get nervous, market order out, and you made money. Great. But what happened to that $995 or $990? You could have simply thought to yourself, ‘You know what? $990 is a good amount of money. Sure, I want that extra $5. But what’s the cost of my time waiting for it to fill. What’s the risk the price falls or goes the wrong way on me and I lose all that hard earned money?’

What you could have done is just sold at $990 and moved on. Yes, it’s great to get that extra bit of cash. And sure, if you’re scalping, we’re talking different trading strategies. But we need to focus on other important costs. The opportunity cost of your mental capital. Mental capital is a huge one. You should have just gotten out of the trade, made your money, and moved on. Don’t be a dick for a tick. Just drop the exit order by a tick, get out, make your money, and go look for the next trade.

Putting Theory Into Practice

This is a real life example of being a dick for a tick in a trade I made at the end of May 2020:

I sold a call spread for credit on Amazon for $2.15 per contract. Successfully bought one back for 50 cents. Another for 35 cents. But what about the third? I wanted to get an extra 10 cents and had the order in at 25 cents. I knew the markets had a chance to reverse and Amazon can easily go into beast mode.

 So this was my position at the end of the day:

I held the position into the next day, feeling stuck with a trade I wanted to be out of earlier because I was trying to make an extra $10. Instead, the trade may go negative on me. On top of that, I’m still stuck thinking about the trade rather than using my mental capital working on the next trade I want to take. It is a waste of energy, time, and money to be a dick for a tick. When the trade is done, get out, move on. Even after years of experienced trading, it’s easy to fall for this one. Here’s the position at the end of the following day, May 28, 2020, still being stuck in the position.

As you can see, the trade was doing a little better by holding it. But still isn’t as good as the 35 cent exit (it was hovering around $0.70-$1 to close the position). There is only one day left before the contract expires. So what was once a simple trade, with easy money, has now turned into a gamble and two days of mental capital instead of the original plan of just an end of day to open/middle of the next day trade.

As you can see by the following image, I did, eventually, on the very last day, make it out profitable with a 55 cent closing price. Luck or not, I still lost something incredibly important – time and mental capital. Clearly, I could have gotten out for the same price, or better, on the originally planned exit. But greed messed me up.

The key takeaway here is take your money, make your money. And run on to the next trade. Not only can you lose precious time and mental capital by trying to squeeze a few extra dollars out of your trade, but a winning trade can very easily and quickly become a loser. In the example above, I was lucky it worked out. But how frustrating would it have been if Amazon had rallied and my two winners were offset by one really bad loser? 

Create a trading strategy and stick to it. Don’t let greed ruin your trading game.

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