Posted in
Education
By: Tom Gentile
on January 6th, 2023
There are times in options trading one feels the markets are out to get you and it seems a gain or a win is never going to happen gain. That is only true if you stop trading completely.
There are times where a gain happens, and you are unsure if you should close the trade and take the profit. Seriously, figuring out when to take a profit is just as difficult for some than knowing when to take a loss.
This educational piece is going to teach a couple of ideas for taking a profit on an option trade. It will ultimately be up to you and your broker what and when you do so as I am not a registered investment advisor. But, as an option trader myself I can educate you on what I consider and leave you to your own devices better educated and better prepared for when the time comes to make such a decision.
A 100% Gain – Close 100% of the Position
Aside from using technical analysis to guide you on your options trading management, one can simply start with the concept of having a target dollar figure or percentage gain amount as your goal.
I usually target 100% ROI as my goal. I will say it is sometimes my first goal as I have a variation of this I will explain next.
A 100% ROI is the same as getting double on my trade. This means I make double what I paid to open the option trade. If I bought an option for $2.00 or $200 for one contract, I then have as a target $4.00 or $400 as my sell to close point.
This results in the trade having earned $2.00 or $200. If I spent $2.00 or $200 then this is a 100% return or a double.
One doesn’t need to have a 100% ROI goal. Yours can be 50% or 70%. The key is managing your option trades so that the amount or percentage gain is larger on average than the amount or percentage losses. I will have more education in future article on trade management when it comes to losses and then discuss overall trade management.
For now, the key is to set a target ROI amount and manage and close the trade when it hits that target.
One other thing you can do is figure out the price needed for the double and set a GTC (Good Till Cancelled) order with your broker so when the last trade/current trade intra day hits that it will automatically sell to close that option position.
Consult with your broker on how to set that up on their online trading platform.
Next up, a variation on this theme.
Profit Goal Reached? Take Half and let the Other Half Run
Here is a variation on the first lesson given, which is set a profit amount or target ROI and sell to close the entire position.
Have you ever sold an option for a profit and then saw it run substantially further in the direction needed and you realize you left some money on the table? Maybe I should have asked How many times that has happened to you?
One way to take some profits and allow yourself to stay in the position in the event the security you are trading the options on runs further in the direction needed is to consider selling to close half the position at your target goal.
You would then hold on to the other half of the position. Should the underlying security continue n the direction needed you can then have a second target goal in mind and let it work towards that.
Example: Take the scenario where you bought to open the option at $2.00 or $2.00 and the security moves as it should, and it goes to $4.00 or $400. Sell to close half the position and hold the rest for the opportunity to keep working in the direction
It’s at this point I should tell you that even though you may have figured it out, you would need an even number of contracts bought to open to do this, as you can’t sell half one contract.
This means you would have had to at least bought to open 2 option contracts.
A consideration is to have your first target goal being a 100% ROI and then your second ROI target another 100% higher or 299% from your original purchase price. Should the value of the options hit that sell to close.
It may not meet that second target goal, but… a consideration is to see If the underlying security goes higher and if not take the profits you feel good about.
If the second half falls back in value to the price you took your first half profits maybe just close the rest out there.
Last, if the last half goes into a loss you will eventually want to preserve what you can.
The Key Lesson
In this lesson and those to come on this topic the key lesson is to have a set plan in place before you spend your first dime on a trade and stick with it. This way when to sell isn’t a mystery as it was planned ahead of time and that means you don’t have to figure out what to do when you already know and can execute the plan accordingly.
App: Toms Option Tools
Market Insight articles may show images of lists of stocks meeting a variety of options parameters like Unusual Call and or Put activity or Expensive IV found on my app Toms Option Tools.
Other times I will have other charts may work to amplify my educational points.
Those options data lists, however, can be found on my app Tom’s Option Tools. Use your device to search up and download this app and get free access to the Morning Reports section of the app.
Other parts of the app are available at a premium subscription rate, but the Morning Reports Lists are yours free.
Disclaimers
Stock and options trading has large potential rewards, but also large potential risk.
You must be aware of the risks and be willing to accept them in order to invest in the stock and options market. Do not trade with money you cannot afford to lose.
This is neither an offer to buy/sell/ or recommend a particular stock or option.
Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been actually executed, the results may have under or overcompensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with hindsight.
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