How To Use Simulated Trades To Make Better Adjustments To Your Option Position

simulated trades

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If you've traded for any amount of time, you know that adjusting a current options positions is a necessary evil whether you need to save profits or reduce risk.

At some point, you'll have a position that needs adjusting. When it comes to making that adjustment, sometimes I like to use simulated trades to plan my entry or exit of new options contracts.

Most broker platforms have some sort of risk/loss or profit/loss diagram that you can use to add simulated positions. If they don't, you need to consider moving to a broker like thinkorswim.

Using these simple charts, you can clearly see where the next contract will likely leave your position if you were to enter the trade.

No more guess work. No more assumptions. No more excuses!

It's a pretty awesome revolution in trading software that we've seen just in the last three years. When adjusting a trade, you want to look for two things.

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What Are You REALLY Getting?

The first thing you need to focus on is how far your money is going? What are you getting out of the adjustment?

If you're buying an option contract to help hedge a position, are you really getting hedged with protection or are you just paying money blindly to the market?

Again this is where having the simulated trade can help. Once you place the simulated order, you will quickly see if the hedge is worth the investment or not by visually looking at the charts.

Rolling: Still High Probability Trade?

Number two is if you're adjusting the trade and rolling into the next contract month, is it still a high probability trade?

In other words, would you make the trade as a NEW trade all again - or would this not even be a consideration?

By simply using dynamic risk graphs that show profit and loss with simulated trades, you can more easily plan your entry and exit with current strategies.

I've found numerous times that this one technique has help saved thousands of dollars by not enter in trades that are bad and by executing trades or contracts that are great for my position.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.