When to Take Profits

I have been writing to you providing my education, market views, and trades that I am considering for a while now.

The positive response and gratitude you all have extended me is humbling, and I am grateful to you for sharing.

It is my goal to provide you quality education on my trading processes and to further cement that education to where you can learn to do this with proficiency and little to no stress.

I realize this is not a one-way street. The conversation isn’t one where I just contribute article after article and you read and make your decisions and we leave it at that.

Far from it…

Today I want to address a question I get asked a lot…and it has a direct bearing on just how much money you can make…

Let’s get started.

You all have written in asking me many questions. Questions in which you have asked me to clarify further what I do with my trading. I like that. I love to talk shop, if you will, and collaborate on trading methods, trades, and market views.

I have received a great deal of emails asking me a wide variety of questions. I have taken the top four most consistent and popular questions, and this article will discuss the first of those four.

This first article will be on the topic of when to sell your options contracts.

Deadline for Selling Options?

This conversation will not delve into when to sell your options if they are profitable or losing money, because those are questions two and three, which I will extrapolate in separate issues.

I have taught that options lose time value faster and faster the closer and closer to expiration they get. Students have asked me if there is a cutoff or deadline amount of time before expiration that I use.

Let me answer it this way. On straight directional option strategies, such as buying or going long on a call or put option, I need to have an expectation on how much time the stock will need in order to make the anticipated move. If you do not have a tool that gives you an expected end date to the run, then you have to use your own form of analysis to determine that. Why is that important? For at least two distinct reasons:

  1. Your options could expire before the time needed for the move to happen; and/or
  1. You end up hanging on to an options trade that peaks and rolls over, all while you are hanging onto the option because you have so much time left before expiration and no clear, complete trade plan that accounts for this.

This latter point risks you getting a profit on the trade but then giving up that profit because you held it too long and it rolled over, giving back gains. Another thing that could happen is that the time value of the option price disappears faster the closer to expiration it gets if it is not moving in the direction you need.

I use a tool called the Money Calendar. It gives me an assessment of what a stock has done performance-wise over the past 10 years.

Click to Enlarge

It shows an End Date, the time frame the stock took, on average, to make a profit move. My rule of thumb is to NOT buy an option that expires BEFORE that end date. To do so would risk the option expiring before the number of days the stock needs in order to make that price move.

Another view:

Click to Enlarge

I look to have the option expiration at least a week or two past the End Date calculation. This way I am using the End Date as the day/date in which I will look to end the trade. So long as that is adhered to, I will not be holding an option up to its expiration date, nor will I have to worry about time running out on my option.

Until next time…

Tom Gentile
America’s #1 Trader

4 Responses to “When to Take Profits”

  1. Dennis Wilson

    Maestro Gentile, Sir:
    The last image of the Money Calendar in your “When To Take Profits” article of June 23rd. I have seen this before but it was when I was learning to read the candles many years ago. Where can we find this handy tool? I’m guessing that you are familiar with most of the options trading platforms available and probably know what this is called under each platform. If it does not betray agreements, could you perhaps share a list by platform of what this Money Calendar is called.
    I read and re-read all of your tutelage, eager to learn from the Master. It’s all good stuff and where I already have an understanding of methods, another perspective is most welcome and many times fills in knowledge gaps.

    Best Regards;

  2. Hi Tom – have not been able to get in on one of your recommended trades yet – every time I go to place my trade – too many questions come up.
    Today for example – IBM – Buy to open, July 31, 2015 strike call @ $167.50 – when I went to place it the ask seemed a point higher than it should have been, then a half hour later it was down a point – a quarter above the bid. So how do we know what ask is reasonable to settle on? How do we get the suggested $2.00 spread? Maybe my account isn’t set up to allow Vertical Call Spreads – as it didn’t seem to be an option?
    Being a newbie I just don’t want to jump in without making wise entries

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