Monday, May 25th, 2020

When to Take Options Profits

 

A recent article in Money Morning bragged about a success options trade and discussed when to take options trading profits.

With options trading, even the smallest move in the underlying stock can result in explosive profits.

Last Wednesday, we saw exactly this scenario play out with one of my Money Calendar Alert investment service recommendations. Our stock made its move, our options skyrocketed, and we doubled our money in just a single trading day.

Of course, when you’re trading options, those quick moves can work both ways – so you have to grab your profits when you can. If you hang on to a trade for too long, it could roll over, and your winning trade could turn into a loser just as quickly.

The point of options trading is to hedge risk or seek profits. But in order for this to work out you need to watch the market. Day traders are accustomed to watching stocks, setting trading stops and exiting a trade with sufficient gains or minimal losses. Options traders can approach the market the same way but simply setting trading stops even if they are not watching the option every minute of the day.

Hedging Risk

Many businesses use options to hedge investment risk. Although the business is not really looking for options profits the principles are the same.

An options trader or an investor need no limit his trading and only use options to hedge investment risk. Options traders often use a variety of put and call combinations in order to profit from anticipate movement of stocks while avoiding undue risk. Traders can also guarantee profits no matter which direction a stock moves in price. For example, a long straddle options strategy involves buying both a put and a call on a stock with the same expiration date. The cost is the price of the put and the call. The trader can profit if the stock goes up or goes down. Only if the stock does not move in price does he lose the price of the premiums paid. However, the same trader can also sell calls or puts on the same stock with the same expiration date. The trader receives the price of the options that he sells which can offset the price of the options that he buys. By careful and up to the minute analysis of stock options it is possible to enter into trades that have no risk of loss but still have a likelihood of profit.

Timing is still the issue. Because of the leverage that options provide profits and losses can multiply in hours and even minutes. If you have a significant trade in the works it is important to pay attention to the market. Setting stop losses is fine but if you do not pay attention you can lose out on significant profits by not being there to reset your profit stop as the value of the option goes up. There are many profitable options strategies but all of them require that you show up for work and pay attention as events unfold.

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