2024 has gotten off to a banner start for Cabot Options Traders as we now have two trades that are at profits of 60%, two trades that are at a gain of more than 175%, and one that is at a potential profit of 500%. Below I will break down how I manage these winning options trades.
First off, let me be perfectly clear, not every trade that I recommend and execute myself will be a winner … I’m looking at you Snap (SNAP), which I thought looked great headed into earnings, and then DIED when the company reported disappointing earnings. Such is trading.
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However, when I do catch a winner, my system is set in stone as to how I will manage that trade. Here are those rules:
My Set-in-Stone Rules for Winning Options Trades
I sell a third of my position at a profit of between 20-30%.
I take profits on a second third of my position when I can lock in a gain of between 60-100%.
And finally, I let the remaining piece of my trade run as high as possible.
Taking partial profits as my system dictates has its ups and downs, and I have a love/hate relationship with it. However, over time it’s proven to be the best way to manage winning options trades. Here is one example …
When we took partial profits of 24% on a third of our Nutanix (NTNX) calls, and the stock raced higher in the weeks/months to come, with the balance of our calls now at a potential profit of 500%, it kills me that we aren’t holding a full position.
However, last week was a perfect example of why we do take partial profits as NTNX (and other stocks in our portfolio PLTR, CELH, MRVL, TSM) fell from their highs when the market was under pressure, and if we didn’t have those partial profits in the bank, I might have sold out of our positions for fear of deeper losses.
However, because we have a system of taking partial profits at 20-30% on the first third, and then 60-100% on the second third, we were able to ride out the short-term weakness. And that patience was rewarded as the Nvidia (NVDA) and AI rally helped push NTNX and others in the portfolio back to higher levels.
The other way I manage these winning options trades is by using mental stops and by raising that mental stop as the stock moves higher. For example, as NTNX raced higher, the calls that we bought for $4.46 were worth $15; I might set my mental stop at $10. Then when those calls were worth $20, I would raise my stop from $10 up to $15.
Big picture, if we have a system that we stick to, I/we shouldn’t second guess taking partial profits, or if a mental stop gets triggered, even if it turns out to be the wrong move in the long run.
And finally, because the Cabot Options Trader portfolio has so many big winners in the portfolio, this week we bought a hedge via a buy of a Nasdaq ETF (QQQ) put that will protect our gains through the Presidential Election. To learn more about that hedge, as well as the Cabot Options Trader system, click here.
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