Banking Your Gains


Date: 6/24/2021
Author: Chris Hood


Be sure to check out new episodes of my video podcast each week, where my ace pupil Brian Jones and I talk the ins and outs of options trading- and give you insights and strategy that you can immediately put to work for you in the markets.

Options trading portfolios are notorious for having huge swings in value.

Imagine you just closed out a bull call spread on GOOGL that nets you an 80% gain today. That trade could have easily been down 65% just 48 hours ago.

You feel like someone stuffed you in a washing machine.

It’s a challenging psychological ride for many new traders.

When you focus only on the net liquidation value of your account, you can feel stuck in a rut.

Obviously, you should be tracking your trades and keeping tabs on your net profits.

This could be as simple as a homemade spreadsheet or a subscription to some online service such as Power Options or Trader Sync.

Regardless of the tracking system, use the following strategy to SEE the fruits of your labor.

Assume your working with a $60,000.00 account. You’ve decided to allocate 2/3 for trading while keeping 1/3 in cash.

Now, allocate your capital according to your trading plan.

Based on your win rate data, you know that long calls and bull put spreads are your bread-and-butter. So you decide to put 20K towards each strategy, allocating only 3% to each trade to minimize risk.

This means you could have 70 open positions in your portfolio at any given time.

You may have several long calls with 200+ days to expiration to capture major trends, along with some shorter duration calls to capitalize on momentum.

You also place a few bull put spreads with expiration dates ranging from 7 to 45 days.

As you take profits on winners and cut losers, you’ll be adding new trades to replace them.

But even though you’re making money, it might not be obvious.

When you cash out a winner then immediately place another trade, your P/L will drop. On a down day, your whole portfolio may look like a bloody crime scene.

FEAR creeps in and erodes your confidence.

For consistent trading income, you’ll need this steady flow of trades. You hit your profit target this week, then plan for the weeks ahead.

You know you’re making money, but it doesn’t feel like it.

Rather than leaving all your capital in your trading account, you can see your realized profit in one of the following four ways.

  1. Withdraw the money from your trading account and put it into a savings account.
  2. Create a secondary account with your broker and move your profits into cash.
  3. Buy shares of a cash alternative like SHY
  4. Accumulate shares of stocks in an investment portfolio.

Take the profits out at regular intervals, such as the end of each week or month.

Now you can actually see your gains.

You’ve created two bins – your profit-producing capital and the money you’ve made. Your profit balance will continue to grow, and you don’t need to worry about the P/L of your trading account.

Decide every 6 months or so if you’d like to trade with more money.

It’s a deliberate decision.

Assume you made an average of 2,000.00 per week for 6 months. You’d be sitting on a balance of 48K in profits.

Perhaps you want to buy something with this money.

Perfectly fine.

However, you may decide to put some of that money back into the markets and trade with a larger account.

You can make more money trading with 80K than 60K.

All this should be part of your overall plan.

Make profits, realize them, then decide what to do with them.

It’s that simple.

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