[Options] Best Practices: Taking Risk Off The Table

So, for example, if I bought ten call contracts for $2.00 each, I would look to sell five of them at $4.00 if given the opportunity. This sale of half pays me back for my original purchase. I paid a $2000 debit to enter the trade (10 contracts x $2.00 per contract x 100), and then received a $2000 credit when I sold half of my position (5 contracts x $4.00 per contact x 100). This leaves me still long 5 long calls with a net cost of basis of ZERO! I don't know about you, but having a free trade on allows me a lot more comfort to ride out any upcoming volatility that might ensue en route to ever higher prices.

It's hard to put a price tag on piece of mind, but at least for me it is so incredibly vital.

Sure, on the trades that keep going higher and higher (think $TSLA), it's easy to kick myself for not holding on to my full position and to keep counting all my "missed" profits. But in my experience, for every one of the those "missed" opportunities, there are three or four times when the momentum eventually fizzled out and the calls ended up worthless at expiration. In the long run, my conservative approach to taking risk off the table yields net-positive results.

Now, I want to introduce a slight wrinkle to this gameplan that presented itself today in a long calls play we're in with Abbott Laboratories $ABT.

Back on July 22nd, we published a piece and got into long $ABT November 110 calls for $2.80 per contract. No sooner than we entered the trade, the stock then began to form another base, essentially trading sideways for four weeks.

Well, today, we got what we hoped for. A big pop following some positive news that has been well received by the market. We don't really care about what the story is, price action gave us all the lead time we needed.

The good news for our long November 110 calls? They were trading north of $8.00 per contract in early going this morning.

Remember, my best practice is to "sell half" when I've doubled my money, right?

Well, in this case, our calls tripled in value! Do I still sell half?

The bad news for me is, I did indeed sell half at the open because I had a resting GTC order to sell half of my position at $5.60. I was being lazy and not monitoring my positions. Of course, this is not a bad problem to have. But thanks to the gap and my $8.00 sale price of half my position, I've now locked in a guaranteed profit on the trade, while still holding half of the original position for an opportunity for even more.

But had I been on the ball, instead of selling half of my position at the open today, I could have sold less and still recouped my original debit. Here’s how:

Using the numbers from above, let's say one was holding ten November 110 contracts coming into today that cost you $2.00 at entry. That net debit would've been $2000. Well, today when $ABT was gapping significantly higher and the Nov 110 calls we're trading around $8.00 per contract, instead of selling half of the position, one might just sell three of the ten contracts at $8.00 each, netting a $2400 credit. This would put a guaranteed profit of $400 in your pocket (nice), yet you'd still be holding 70% of your original position for the opportunity to participate in a monster win (YES!).

I wish I had done this. But that's my price of laziness. Only time will tell if I got lucky and accidentally made the right move.

~ @chicagosean

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