Hi Depy: SELL STRATEGY.... good question. I would consider a couple of scenarios. Remember, I'm talking options.
1.) One approach is a disciplined approach. Years ago when I started investing in options, I would use what I considered to be a very disciplined approach whereby I set sell limits based on a specific percent.
For example, if the investment appreciates 25%, I'd close the position, or sell half, something like that. If it goes down by 20%, for example, I'd sell and get out. There's an old rule that says that if an option loses 30%, it will probably lose it all. I don't use that approach anymore but it is still a good one.
2.) Another approach, and the one I use, is not to use the automatic set limits per se, but to consider the movement of the individual position which, in some instances, would otherwise be stopped out using the first approach. This is much more dangerous because it requires you to know the position and its reaction to the stock like the back of your hand, along with riding out greater swings.
One position may have volatile swings of 20% in a single day. You would not necessarily want to set a sell limit at a designated 20% loss if that is not an unusual intraday swing for example. But, you may want to set a sell limit if it goes up 20% in a day. So, it varies. Nothing concrete.
Also, time is a factor with options, of course, so you must take into account how much time is left. I am much more willing to ride out a 30% loss in an options position that has 6-7 months left versus one that expires in 60 days.
There are a number of other considerations and variables, of course, but the bottom line is to consider all of them and base your decision on the whole versus a set percent or price. This approach takes experience and is more risky.
OK, all that being said, the CIEN example was one that I did get stopped out on. And yes, then the thing went sky-rocketing back up the next day or so. But remember, I was out of town and was not going to be able to attend to my positions. For safety, I set a low stop loss. A safety net so to speak. Well, while I was gone, it tanked and I got stopped out. Had I been where I could have watched the entire market that day, watched the underlying stock versus other similar stocks, seen how they were doing, etc. then I might very well have not sold.
A general area that I do consider selling is around that 30% loss. If I have an options position that goes down 30% from where I bought it, then I'm on notice and I'm looking closer at what has happened and why to assess whether I cut losses and get out. I'll use the approach that I just described, factoring in news, market, and time.
Now if it goes up, then I usually take some off the table at 50% profit, unless it is a portion of a position that I'm churning whereby I may take those 20% swings.
Below is a post I made sometime back in response to a question from Clappy. It provides some additional info.
Depy, hope this helps and is not too long. I wanted to adequately address your important question. Options can be so rewarding but yet so dangerous.
Hope you had a good weekend.
RR
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To: claptonsguitar who wrote (25085)
From: RR Thursday, Jul 13, 2000 10:38 PM ET
Reply # of 32824
Hi Clappy: SELL STRATEGY. The other day you asked about BRCD and CREE and my comment that I may take some profits in them and wanted to know why and how I take profits.
It varies significantly.
1.) Remember I only do options. I take positions. Some positions are for quick turnarounds, working the underlying stocks volatility to death... that means potential money to options. Those swings can generate huge gains (and losses of course).
That is what I have done with CREE for months. I have made an obnoxious amount of profit off CREE options this year, just taking profits on a regular basis and then on a pullback a day or so later, then re-entering.
I don't tell the Porch every time I sell things. Too crazy. Too dangerous. To wild. Everyone would think I was nuts. What I do is tell folks my positions, then leave the trading of them to the individual style (i.e. hold versus churn the way I do). Sometimes I'll put on here and announce when I am rotating out or if I see something that makes me want to exit a position for awhile. Usually, I don't announce when I'm selling if it is just churning the options position because I may be right back in it one hour later.
The other day I said that I may take some profit on CREE and BRCD. The reason was I had run up a huge profit in both options positions in each and I like to sometimes take a bit off the table and move it. In this case I was going to add to JDSU and NTAP. I ended up not selling CREE ot BRCD that day because they started to run.
2.) In positions that I don't churn a whole lot, then when I build up a significant profit, say 50%, then I might take some off the table. That depends on the market conditions of course and especially if the stock is about to run or not. I wouldn't want to take it off the table too quickly. Just like I held BRCD and CREE the other day when they started to run. But, the point is, that once I run up a nice profit, I do like to take some off the table. I have absolutely no set rule.
3.) Longer term positions, like leaps, I tend to hold and not sell. Leaps are like stock substitution to me. I'll let leaps just sit there and appreciate. It is a nice psychological thing as well knowing you are sitting on some profits in positions that don't expire for a long time, say 18 months. I will take profits and sell if the story changes. I did not follow this rule on QCOM. I still have QCOM leaps but I am sitting on profit in those leaps as I bought them moons ago.
4.) If a position turns against me, I sell immediately. I don't wait. I don't wonder what happened. I sell and get out........
Preserve capital is rule 1 in my house!
Now your next question will be at what level. I don't have one. Again, there are so many variables. Expected volatility, company news, bad earnings, all kinds of things. With the positions that I hold nowadays, they have a lot of volatility, so I can't say that if my position goes down 20% I sell, heck, I may have 30% swings every day. Also, I will use stop limits. I just put them in place for the several hundred UCQIS, JDSU, Sept. 95 calls I still hold. I was still sitting on profit even with JDSU down the other day, but I had to play it safe with that one due to the news on it, consequently, I protected my profit with stops. So, that is sort of a sell strategy, or closing of a position strategy I use.
5.) Don't be hestitant to take small profits if that is what you want. Take small profits over and over and over again until you are stinky wealthy!
Clappy, this is long. Didn't mean for it to be, but really, I could not give you an answer without explaining some further rationale. I probably left some things out, too, that I'll remember later. This is some of what I do. I firmly believe that each person must develop their own style that fits for them. This works for me but it is not for everybody, and remember, I'm talking options, not stocks. I can't recall the last time I owned a stock.
Been one heck of a long week for me with little sleep due to a monster trial that I had. It finished today. That's why I could not respond sooner and hope you understand. Hope this helps and hope I didn't ramble too much. Heck, I just hope it makes sense as I'm pretty pooped right now.
Take care.
RR |
