I’ve received a few emails over the past few weeks from people who had long calls trades that went their way – a good problem to have. But they had questions about how to manage them.
They hear me often talking about selling half of my calls when they’ve doubled in value, giving my original risk capital back, while also offering a risk-free ride on the remaining half position. This is a Best Practice I frequently employ.
The question is some variation of: “Ok, great advice. But how do I do that if I only purchased a one-lot?”
For the record, I trade a ton of one-lot trades, especially on higher-priced stocks. So I’m very aware of this issue.
To take profits out of a winning long calls trade while still remaining exposed for more upside, there are two options that I prefer:
- I can roll my long calls up a few strikes, trying to collect a credit that roughly equals the original debit paid to get into the trade. “Rolling” means executing a vertical spread order which consists of a sell of the long calls I’m currently holding and a simultaneous buy of new calls at a higher strike price (in the same series) for a net credit. The net credit pays me back my original risk capital, and I’m still holding long calls for any further upside – unlimited!
- For a more conservative approach, I can keep my original long call and then short-sell to open an out-of-the-money call in the same expiration series that is roughly equal in value to the original debit I paid for the long call. This pays me back my original risk capital, converting my position into a bull call spread that has further upside potential from here but has max gains capped at the short strike.
Neither option is necessarily better than the other, it really comes down to how aggressive we want to continue to be with a position.
If I think a big move is only just getting started, option 1 is probably the better move. On the other hand, if the stock feels extended, then option 2 might make more sense.
Options always give us options.
Trade ’em Well,
Chief Options Strategist
All Star Charts, Technical Analysis Research