Taking partial profits (options)

[swingstar]

Hi everyone

I've read a number of books that emphasise taking partial profits. Conversely some mention adding to the position if it still has movement ahead of it.

I'm wondering then what do others here do? If you do the former above, then that is sizing down your position yeah? What is better, adding or taking?

I usually just let my trade run. Infact I've only ever added to a position once, all others I've just let run and closed out the whole position when satisfied.

Cheers

 

[Magdoran]

Hello swingstar,


This is a really good question, and one that is actually quite relevant to a range of derivative approaches. Let me just “cut to the chase” and say what I do for directional trades (credit spreads, non-directional trades and volatility plays need different handling), and not deal much with the broader picture and the variables for individuals.

I exit partial positions near forecast points of resistance if net long the underlying, or support if net short the underlying. Generally this is half the position, but can be one third for positions I’m very confident in, or two thirds for positions I determine are more likely to fail. (In complex positions it may mean adjusting the trade - buying back sold positions, or selling bought ones or both).

The remaining position then has a trailing stop loss, or is exited when the drive satisfies a predetermined exit criterion (profit or stop).

I also look to re-enter the trade on a counter trend, or when a trend resumes after a pull back (sometimes just adding the amount of the exited partial position, or sometimes adding more capital to the remaining position than the exited half).

Key concepts are to take profits to defend against apparent moves that fail. The classic result being overstaying a position that was profitable when the underlying moves in your favour initially, but then reverses, and turns into a loss. Something you can avoid with partial positions.

If my position doubles in value, I usually exit half to lock in profit – essentially you can’t lose then, and can sit comfortably letting the winner run.

Also, I look to exit options on strong moves, especially with options that you have bought, and the IV kicks up in your favour. Sometimes the high value for the option is on the day of an exhaustive drive, never to be repeated even if the underlying continues to drift in your direction – time frame is a critical element here.

More broadly though, there are many potential profit taking and stop loss configurations, and a lot of this will depend on each individual. Key variables are:

• Financial goal/chosen market/type of instrument
• Analysis – (style of) Technical, Fundamental, hybrid, alternative
• Strategy – directional, non-directional, volatility, other (e.g. Gamma)
• Risk Tolerance – conservative, aggressive, moderate, etc
• Timeframe - intraday, short term, position trading, mid term, or long term
• System approach – e.g. expected win/loss ratios
• Position Size (you may set percentages of your overall capital for instance)
• Personal preferences


As you can imagine there are a host of possibilities from trading from no set levels (pure discretionary) to complex regimented rules.

Hope this helps!

Regards,


Magdoran

 

[cuttlefish]

Having learnt from the past, I've decided that taking partial profits will be part of my strategy and have been doing so over the past week on the short position I've got. One part of the reasoning is that it actually makes me feel more comfortable with letting the rest of the position run and not panicking on small pullbacks along the way. Also takes away the challenge of trying to pick the top/bottom.

Today I decided to try selling some IV as well with the hope of buying some of it back in a day or two and also rolling to a strike with a little more gamma and a little less delta. (I didn't open to short IV, not that reckless, just closed out long IV positions, so really just took more profit than I intended to today).

I'm either starting to learn the meaning of these terms or speaking complete dribble.

 

[cuttlefish]

.
Today I decided to try selling some IV as well with the hope of buying some of it back in a day or two and also rolling to a strike with a little more gamma and a little less delta. (I didn't open to short IV, not that reckless, just closed out long IV positions, so really just took more profit than I intended to today).

I'm either starting to learn the meaning of these terms or speaking complete dribble.

In thinking about this stuff, I think I've been overthinking it, and all I've done is an ill contrived each way bet on something I don't understand.

There's a lot to learn about volatility isn't there? Nothing like doing it to learn though.

 

[Crazy Shark]

thats right cuttlefish.

I've traded options for years and have experienced euphoria and a feeeling of invincibility and also wanted to jump in front of the next bullet train.

You can read all the books and go to all the courses but until you fork out the money and watch them behave like no author or expert has even imagined, then you cannot comprehend their behaviour

 

[wayneL]

You can read all the books and go to all the courses but until you fork out the money and watch them behave like no author or expert has even imagined, then you cannot comprehend their behaviour

Whoa there sapphire!

I've NEVER seen any option behaviour that wasn't imagined and already modelled....and if so, it would be arbed away in a heartbeat.

Granted there are inherent problems in the various models... particularly close to expiry. But those problems are well known and considered by true experts.

Its just that the great majority of books/courses either 1/ don't know enough or 2/ just don't tell you.

Cheers

 

[cuttlefish]

Whoa there sapphire!

... and if so, it would be arbed away in a heartbeat.

I suspect thats happened to at least one or two of my orders over the past month LOL.

Maybe I should start a thread called "what the books don't tell you."

 

[professor_frink]

alot of the time if I'm long an option I simply sell half my stake if it doubles up. Cuts back on profit potential when you get a huge move like we had in march/april, but lets me sleep better knowing I can't lose on the position whilst still having exposure to any remaining upside.
Being a lazy ba@#&*d, I like my sleep alot, so this behaviour fits in quite well with my trading

 

[swingstar]

I've never had an option go against me when I've been "right" on a trade. Maybe I'm just lucky?

All I do is buy calls/puts, or sometimes I do bull credit spreads where I go way out of the money.

My next step is learning all about the greeks, but so far not knowing them hasn't affected me that I can tell.

 

[Crazy Shark]

I need your trading strategy

 

[swingstar]

I follow trends and buy calls/puts at the money when otherwise someone would buy the shares outright. I mostly trade pullbacks but I'll monitor any stock that's looking to break out. I also have very tight stops. Very simple and it's worked so far. I focus more on money management than I do getting the market "right".