As the market was again making new highs yesterday afternoon, I received a question from a reader asking about how I handle winning trades. And as many of you likely have big winning stock and option trades in your portfolio, this seemed like a great subject to share with all of my Cabot Options Trader/Cabot Options Trader Pro subscribers. Here was the question:
“Is there ever a time when you figure you have gotten all you can get out of a trade and take your profit on the total investment and get out before expiration date? I would like to know what you think or recommend I do with the following trade:
“I bought XXX Calls on 7/13/17. I have seen the value of my investment bounce anywhere from +$400 to +3,720 this morning. I figure close to a 265% gain in less than three months is a fantastic amount, and am wondering if you really can expect to make much more on the trade in the coming months? I know you always like to sell half and let the other half ride, but it still doesn’t tell me how far a trade can be expected to go.”
This is a great question. Unfortunately, there’s no great answer; trading would be too easy if we all knew when to get in and when to get out.
Take, for example, our NVDA trade from last year. I sold our calls for an approximate gain of 600%. I was a hero! Except, the stock kept going and going and going. So clearly, I sold too early.
However, what allowed me to let the position to run to a profit of over 600% was that I continued to raise stops along the way higher. (We have used a similar strategy in Fiat Chrysler and other stocks in years past.)
So this is what I recommend for situations like this: If the option is worth $5, put in a stop at $4. That will protect you from losing the gains.
And if the option keeps going higher, keep raising that stop. So when the call is worth $6, raise your stop to $5. And keep raising it. That gives you continued upside, while limiting your downside.
You might get stopped out if the stock dips down temporarily, like NVDA did to us last year. But I have found this strategy to work well when handling big winning trades.