Hi Jay (call me Mark)
Glad to hear you found the article helpful. Thank you.
1)Why 2 x 5? Good question. To a point, choosing the ratio was close to random - but - because my primary purpose was to sell puts I had to be certain that I received enough cash when opening the position to make it worthwhile. In other words, if the stock were to open 5 point higher the next day, and I were unable to sell my long puts at any price (because of no bids), then I wanted to have a reasonable profit. 2 x 5 gave me enough cash to satisfy that condition.
As I said, it's sort of random. The lower the ratio, the less downside risk. Thus, on these spreads, I try to find a combination of downside risk and upside reward that makes me comfortable. Each trader has a different comfort zone and risk tolerance.
2) Much more difficult question. It's important not to let a few large losses wipe out many winning trades. There are no hard and fast rules for me. I often cut losses when the stock give a sell signal on my charts. But, I am not a strong believer in technical analysis, so besides charts, I cut losses when I no longer believe the stock will behave as I hoped it would or when potential losses look too large.
Time I hold the trade is not important (to me), so that does not count in making the 'take loss' decision. I don't want to evade the question, but each trader needs his own rules for getting out of losing trades. One sound rule might be: Risk no more than x% of you capital in any single trade. If you lose that, quit. Many traders use 2% as a rule of thumb. Thus, a trader with 100,000 in capital cuts losses at 2,000 for any given trade.
You are very welcome.
A very helpful article. Two questions.
1. Why did you do a 2 by 5 spread? What criteria did you
use? The amount of the credit, the risk/reward, etc? Why
not a 3 by 7 or a 1 by 2?
2. On page 72, second paragraph "Knowing when to cut losses
is a crucial skill....." What types of criteria do you use
to cut losses; support resistance, moving averages, days in
the trade, etc?
Thank you so much for answering these questions.