One of the most important lessons in options trading is understanding just how much harder it gets to recover from big losses. That’s why I don’t ever want to lose more than 20% to 30% on any given position.
Once losses get larger than that, the gains required to get back to even start to get out of hand.
If I lose 20%, I only need a 25% gain to get back to parity. That’s completely doable — we see 25% gains all the time. If I lose 30%, I need about 43% to recover. Still realistic.
But if I lose 40%, I need 66% to get back, and if I lose 50%, I have to double my money just to break even. Those kinds of trades are possible, but they’re much more rare.
That’s why I consider the 20% to 30% range the sweet spot. I can recover quickly and keep the compounding process going.
A Small Loss Is a Strategic Choice
Take a recent trade in Fortinet (FTNT), for example. That one kept firing and chopping sideways. It wasn’t really moving lower — it just wasn’t moving at all.
But we didn’t buy a lot of time on that trade, so rather than wait and let time value eat away at it, I chose to stop out with a small loss around 22% or 23%.
The idea is simple…
If the signal’s not working fast enough and there’s no reason to expect an imminent bounce, I’d rather cut the trade and move on. That way, the next signal — even a modest winner — can make up for that small loss and get us back to profit.
Why Bigger Losses Aren’t Worth the Risk
Once a trade is down 40% or more, the road to recovery gets steeper. Those triple-digit gains do happen, but they’re not frequent. If you’re constantly digging out of a 50% hole, it puts unnecessary pressure on every trade.
I’d rather take the smaller hit and move on.
This is why risk management is everything. I want to make it as easy as possible to get back to green. And the way I do that is by making sure I never let any one trade go too far against me.
Kane Shieh
Kane Shieh Trading
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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
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