The Price Is Right

 

Date: 5/4/2021
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.


 

You’ve found a GREAT set-up.

All of your technical indicators are giving you buy signals, so you decide to place your trade.

Hold on for a minute. Before you hit the confirm button with your order, ask yourself:

“When are you going to take profits?”

If you can’t answer this question, then don’t place the trade. 

Knowing when you’ll get out with your gains is a critical part of the entry.

Without exit rules, you’ll be just like 99% of the retail traders out there, watching your P/L and getting caught up in emotional decisions.

You’ll close the position too early, risking dollars to make pennies, or you’ll ride the trade so long that it reverses.

As you watch your potential gains disappear, you’ll violently curse yourself for not taking profits when you had them.

I know this feeling – I’ve been there many times.

Knowing when to take profits MUST be part of your plan.

There are many ways to determine exits and take money off the table. 

None of them are perfect, but they don’t need to be. They just need to be pre-defined and consistent.

The proof is in your outcome – if you’re making money it’s right. If not, then tweak it until you’re profitable.

One method is to aim for a specific increase in the options price – such as 60-80%.

Many traders choose a specific percentage gain for taking profits. This is especially true on bull put and bear call credit spreads. 

It is an equally workable strategy for long calls, long puts, or debit spreads.

After you place your order, just set your autoclose order and let the platform do the work.

For example, you’re bullish on gold stocks, so you purchase a long call on GDX for the Sep 17th, 2021 expiration at the 31.00 strike and paid 5.65 for the contract.

Buy 1 GDX 17 Sep 21 100 31 @5.65

To autoclose at 70% of the purchase price, determine 170% of the purchase price (5.65 x 1.7 = 9.61) set a good until canceled (GTC) sell order at 9.61. 

Then just leave it alone.

A second, more sophisticated method that you might use for trading a long-term trend is to set an alert on your platform based a technical indicator.

For example, you purchased an XME long call for Jan 21, 2022.

You plan on staying in this longer trend so you gave yourself 236 days until expiration.

XME seems to respect the 34-period EMA and want to keep going until it closes below this price.

Set an alert in your platform to let you know when it closes below this line on the daily chart and take profits the following day.

If moving averages aren’t your signal of choice, it doesn’t matter. 

Fibonacci levels, Keltner channels, or VWAP. As long as it fits your rules and style, then use it. 

The takeaway is that no consistently profitable trader chooses their exit in the heat of the moment when emotions are high.

Price targets, percentage levels, or some other method must guide your actions, especially with options.

Know when you’re getting in. Know when you’re getting out.

If you plan to scale into a winning trade or build your position during a pullback, decide in advance when you’ll take action.

Planning is everything.

Get to it.

Next time we are going to get back into one of the most important parts of trading, psychology.

Click the image to watch the replay of my live coaching webinar- what is the “Paycheck Trade,” and how can you use it to start making profits every week?

Find out now- this webinar is up for a limited time!

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