What to do after you enter

Most of this course has been about choosing a trade. This chapter is about the part almost every beginner neglects: what happens after the trade is on. A position left unmanaged is a hope, not a plan, and the difference between the two is usually decided in the calm minute before you enter, not in the panicked hour when the market moves. So the first rule of managing a trade is to decide how it ends before it begins.

Decide the exit before you enter

Before you place any strategy, write down two numbers: the profit at which you will take the trade off, and the loss at which you will admit you were wrong. For a defined-risk trade you already know the theoretical maximum of each from the payoff, so this is a matter of choosing a fraction of them. The point is not the exact levels. The point is that they exist, on paper, before your money and your ego are in the position and arguing with you.

Booking profit: do not squeeze the last drop

For the premium-selling trades, the credit spreads, the iron condors, there is a specific discipline worth knowing. As one of these trades moves your way, most of the profit arrives early, and the last portion comes slowly while the risk of a reversal stays high. Many traders therefore close a winning credit trade once it has captured a large part, often around half, of its maximum profit, rather than holding to expiry to wring out the rest. You give up a little to lock in the bulk and to free the margin for the next trade. For a debit trade you bought, the mirror applies: have a target move, and when it arrives, take it, rather than waiting for the perfect top that rarely comes.

Cutting losses: the whole game for undefined risk

For a defined-risk trade, cutting a loss is a choice: you can let it ride to the known maximum, or close earlier if your reason for the trade has broken. Either can be defensible, as long as it was decided in advance. For an undefined-risk trade, cutting is not a choice, it is survival. A naked short option that moves against you has no natural stopping point, so a pre-set exit is the only thing standing between you and the kind of loss that ends an account. If you ever hold undefined risk, the stop is not optional.

Rolling and adjusting

When a trade is threatened but your thesis is still alive, you have tools between doing nothing and closing.

Rolling moves a position to different strikes or a later expiry. Rolling out, to a later expiry, buys your thesis more time, often for a small extra credit or debit. Rolling down or up, to new strikes, follows the market or steps away from a threatened level. For example, a bull put spread being pressed by a falling market can sometimes be rolled down and out, to lower strikes in a later expiry, for a credit, giving the trade room and time to recover.

Adjusting changes the shape of the position by adding or converting a leg. The clearest example is defensive: a short call that is turning against you can be capped by buying a higher call, converting a naked, unlimited risk into a defined-risk spread on the spot. Adding a leg to hedge a tested side is the same idea, trading some profit for a smaller, known risk.

Both are useful, and both are dangerous for the same reason: they are easy to use as a way of not admitting a loss. Rolling a losing trade again and again to avoid booking it often just enlarges the position and the eventual loss, turning a small, planned defeat into a large, unplanned one. An adjustment should follow the plan you made at entry, or a genuine change in your view, never the simple wish that the market come back. Very often the best adjustment is the plainest one: close the trade and move on.

Manage the approach to expiry

One timing point ties into the next chapter. As expiry nears, an option near its strike becomes jumpy: its delta can swing fast, which is the gamma you met in Options Basics, so a position that was calm all week can lurch on the final day. Unless you specifically intend to carry a trade into expiry, it is usually calmer, and as the next chapter shows, often cheaper, to close it a little before. Do not drift into an expiry you did not choose.

What to carry forward

A trade well chosen is only half the job; managing it is the other half, and it is won or lost before you enter, when you decide the profit target and the maximum loss on paper. Book most credit trades before their last, slow, risky bit of profit; cut undefined risk without hesitation; and use rolling and adjusting to follow a plan, not to dodge a loss, knowing that closing is frequently the wisest move. The next chapter explains why closing before expiry is not only calmer but usually cheaper, by opening up the real costs and Indian taxes that the payoff diagram has been quietly ignoring all along.