How To Manage Winners

One question we get often is: Should I sell or let it ride?

Let’s take a trade example shared by one of our group members.

He picked up (3) Calls at $3.70 per contract in 29MAY expiration cycle (10 days until expiration) and now they’re trading at $6.40

$GD 29MAY 135 CALL WITH STOCK TRADING AT 139.48

With 10 days until expiration, there isn’t a whole lot of time to deal with this trade and every day counts as this position becomes very sensitive to price change. If the underlying continues to rally, this option will continue to increase in value as it goes deeper In The Money (ITM).

On the flip side, if the underlying falls back to 130 level then this option will lose all of its intrinsic value and will only have some time value left until this contract expires. If the stock is below 135 at expiration, this option will expire worthless and the entire investment will be lost.
The good news is, We Got Options! Literally.

Now we know that leaving it untouched could be Win Big or Go Bust.

One topic that we cover often with our members is How To Manage Winners.

We can also consider the following adjustment.

This trade has a total capital at risk of $1,110 (3.70 x 3 x 100 shares). Now that this option is trading at $6.40 (+72.97%), I would consider selling 2 of 3 calls, taking back $1,280 to bring home my initial investment of $1,110 and leaving 1 of 3 calls open anticipating further upside with no risk left in the trade.

As a matter of fact, this trade would make a small profit if everything went to $0 after this adjustment. Here’s why. I spent $1,110 to buy 3 calls and collected $1,280 selling 2 of them. This leaves me with a NET +$170 credit to hold the remaining 1 call until expiration.

If the stock is at 130 at expiration, the remaining 1 call is worth $0 and I get to keep the $170 credit. If the stock is at 160 at expiration, the remaining 1 call is worth $2,500 and this trade is a $2,670 winner (2500+170).

Similarly, we can consider selling calls at a higher strike price to turn this trade into a Bull Call spread or a Debit Call Vertical to reduce the amount of capital that is at risk while remaining in the trade.

Another idea would be to sell call options with less time until expiration, converting this trade into a Call Diagonal spread, removing some or all of the capital tied up in the trade, and leaving a riskless trade on for the remainder of the time until expiration.

In conclusion, there is no limit to potential adjustments that can be made in order to protect the profits in the trade. We teach our members to find a solution that works best for them and I hope you found this piece of information useful.

Thank you for taking the time to read this post.