 What's up guys? Today we are going to be talking about risk management with options. This is Preston from Xtrades. So the most important thing that a newer options trader needs to learn is to set a stop loss. It first of all prevents the diamond-handing mentality, which basically, if you're not familiar with it, is someone who their contracts are down 30-40-50% and they basically say, I'm going to hold, it's going to come back. All this stuff and they stress about the position, but they didn't set a stop loss and they're already down half the premium or half the money that they've put in that they think, okay, what's the other half of my money? What does that matter? I'll just let it sit and it's going to come back for sure. So I'll diamond hand it. I'll hold it and it works 10% of the time, but fails like 90% of the time, but that 10% makes people continue to do it because it's gambling. That's when options trading becomes like actual gambling. But setting a stop loss prevents that when you set a stop loss at 20% or whatever your personal account size is. You don't want to lose more than 1% of your account, but of course, if you have a smaller account or a challenge account kind of thing, then you figure it out for yourself. But another thing about setting a stop loss, it relieves stress about the position because you can go away from your computer, you can get a drink, you get some food, you could just get less in your screen time because moving into the next bullet point from this, you already know your max loss before getting into the position because if you know how many contracts you're going to buy and you know what your stop loss is at, then you already know how much money you can lose on that position, you can calculate it before. And so that relief stress, not wondering, oh gosh, like if you go instantly read by 1% or whatever, you're not stressing about how bad could this position go. And that's definitely one thing that making options trading the least stressful as possible for yourself will make you the most profitable because you're not staring at your screen, watching every little move on the stock when your contract is a month out. And where to set a stop loss? Like I said, the first place you could set it is depending on your account size or anything like that is just like 20% or however much money you're okay with losing or however much premium you're okay with losing because when it comes down to it, you could set it at like 20% of the contract. But if you're trading contracts that are like a month out, two months out, or on a ticker that moves a lot, like Tesla or something where the premiums are high even for weeklies, setting it at 20% is going to be a good chunk of change depending on your account size. And so you could change it to I don't want to lose more than $100 on this play or anything like that. But another good thing to go with is if you are taking calls off of like a bounce of support or a breakout of resistance that's backtesting that breakout resistance as support, then you can set a stop loss below key supports. And there's ways to calculate the stock price to contract price, how those are similar or how they correlate to each other. But I pretty much just will eyeball it like see where the contract was around support and then try to kind of guesstimate with how theta will affect it and then see where that contract would be if it got just below not just below because you want to give it a little leeway. But if you went like a dollar below support or something like that, depending on the ticker. So you want to try to figure that out and then set your stop loss accordingly. And then setting a take profit or using a trailing stop. So a take profit is basically how it sounds. You have a point at which you take profit. It's the inverse of a stop loss. You either set it at a certain dollar amount that you want to take profit at. And again, you can calculate that just like the stop loss. You can see how much money if you set a stop loss and a take profit, you can see how much money you'll lose if the trade goes south or you can see how much premium you'll make if the trade goes your way with a take profit. Like by calculating what the contract price is that you plan to set your take profit at and how many contracts you have or will sell at that point. And so going into my first bullet, typically take off half a position at first profit take. So I will usually have my take profits around 20%, if not a little higher, depending on what the contract is. Because like if the contract is $50 in premium, like say it's a zero day to expiration or anything like that, then 20% isn't too much. I mean, at that point, if you're playing zero days, it's kind of a lotto. And so you would take that. But maybe you set it for a little higher because you're expecting a big move. So you set it at 50% or 100% or something like that. But it's just like you take off half the position or the whole position depending on how many contracts you have. Half off would be like if you have four contracts or six contracts, something like that. And then set around key resistance levels just like set around the key support levels for stop loss, for profit takes, you set them around key resistance levels or where you expect the stock to the stock price to like slow down. So around a resistance level, it can tap it and then sort of reject and kill some contract premium and then get retest, maybe break through a little bit and then give up hope. So I mean, if you have a monthly or a couple months out, it's not necessarily a problem, but this is like more for weeklies or like one month out, you set it on a key resistance level. And if you have a couple months out or a leap, then it doesn't matter. You can maybe sell one contract or however many you have. But this would be a really good profit take for if the time is winding down on the contract and you need to start taking some profit. And then a trailing stop is basically moving your stop loss up as the contract goes into profit. I've done a video on this before a while ago, but yeah. So when the, when your contract price say hits that first profit take, whether it's 20% or that key resistance levels around there, you can move your stop loss up depending where the contract price is itself. You can move your stop loss up to entry or you can move it into profit. So basically if you take half off at your first profit take and then move your stop loss up to your entry, then you at least got half the profit. And then if the stock goes, if the trade goes south, then whatever, it doesn't matter. You still came out green on the trade. Like of course it sucks, but you still, you still made premium nonetheless. Whereas if you would have kept your stop loss where it was, then you would have lost all your profit and you would have been red now. So just something to think about. It goes the same way for puts. This is just all set up for calls right here. Same thing with the stop loss, but carrying on last thing is hedging. So you want to hedge with shorter term positions, the opposite direction on month out calls or puts. Basically meaning if you have a call that is a couple months out, then you would hedge with like a shorter term put. So here, let's go over to TD. And so let's say we're looking at snow here. This is what I have pulled up. It's currently market hours, but let's say we have a October 15th to 70 call. I mean, that premium is insane, but just for the hypothetical sake of things, let's say, and that volume isn't very good, but let's say, yeah, so we have an October 15th call for snow. And then we're not too sure with the stock, we're not too sure where it's going to go. It's got this perfect. It's got this 271 level right here. We're expecting a break before October, of course. I mean, it's whatever, about three months out at this point. So we expect a break at some point, but we don't know if we could reject this resistance and come back down to the support. So what we're going to do is we're going to go to, let's say August 20th and buy something like, you know, a little further out of money, but let's see, where is this? That's just 240. So we got some leeway here, but you could get like, depending on if you're spending the 2000 for the call, then I would typically go like half that for the hedge. So you could go around like the 262.5 putt or the 260 putt, just a hedge in case we were to reject this resistance and go down like test of support around here. This would be perfect. 262.5. This is right around there. So you would bounce off the support, sell that hedge, and then you'd be golden. Otherwise they keep going and that hedge would gain a lot of money or gain a lot of premium, whereas your further out contract wouldn't lose as much because it has, the Greeks on it are better. So that's pretty much how a hedge would work. Let's go back to present here. And then just the overview. Setting a stop loss, we'll let it call or a put either 20% or at a key. So when you lose a key support or resistance, so under those or over those set profit takes, move stop loss up. So set a profit take around 20% or a key resistance or support levels, depending on call or put, move stop loss to entry or into profit so that you profit on the trade nonetheless, and hedge your positions with shorter term contracts, just in case you're hoping for a break of resistance or a loss of support. Then if it doesn't get the move you want right away, if it goes in the opposite direction, you still profit. All right. Thank you.