how to lock profits
- Thread starter met1989
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There is so much to that question I'm not sure even where to begin. The one thing I would suggest is get good at losing--and not that 'good sportsmanship' BS....I mean taking your ball and going home.
Specifically, it depends how deep ITM your call is. If it's so deep that parity is inside the spread, there's little downside to shorting and exercising. If there's time premium left, it's just taking some of the position off the table. There's really no single right answer to it. There's a lot of ways to do it successfully
Specifically, it depends how deep ITM your call is. If it's so deep that parity is inside the spread, there's little downside to shorting and exercising. If there's time premium left, it's just taking some of the position off the table. There's really no single right answer to it. There's a lot of ways to do it successfully
If you wished to lock in that profit, you could do as smallfil posted, and sell-to-exit.
At that point, should the underlying fall, you have 100% of your current profit.
Should the underlying continue to climb, you don't participate.
Put slightly differently, if you owned the 340, you could sell it now, and realize a greater profit/harvest than if you waited. {$32 versus eventual $16}
As an alternative, you could sell an ATM option, and lock in the difference between your long and short position:
TSLA is at $356 right now.
TSLA Jul20 340 call is ~$32. ($16 extrinsic; $16 time value)
TSLA Jul20 355 call is ~$23.50 ($1.50 extrinsic; $22 time value)
If you sold the 355 against your owned 340, you would lock in $15 extrinsic net on expiration, you would also have an additional $22 in hand, from the time value of the sold ATM 355 call. {bringing in now $37}
This is what happens if TSLA doesn't move.
What happens if TSLA...
falls by $20??
falls by $10??
climbs by $10??
climbs by $20?!?
Graph this out. And then make your choice.
At that point, should the underlying fall, you have 100% of your current profit.
Should the underlying continue to climb, you don't participate.
Put slightly differently, if you owned the 340, you could sell it now, and realize a greater profit/harvest than if you waited. {$32 versus eventual $16}
As an alternative, you could sell an ATM option, and lock in the difference between your long and short position:
TSLA is at $356 right now.
TSLA Jul20 340 call is ~$32. ($16 extrinsic; $16 time value)
TSLA Jul20 355 call is ~$23.50 ($1.50 extrinsic; $22 time value)
If you sold the 355 against your owned 340, you would lock in $15 extrinsic net on expiration, you would also have an additional $22 in hand, from the time value of the sold ATM 355 call. {bringing in now $37}
This is what happens if TSLA doesn't move.
What happens if TSLA...
falls by $20??
falls by $10??
climbs by $10??
climbs by $20?!?
Graph this out. And then make your choice.
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@tommcginnis always gives good answers
There are various approaches to "rolling" your call up that may accomplish what you wish. For example, if you have ample time remaining, you "may" chose to roll your strike up based on delta. Investools "preached" a scheme of buying the call at 70 delta, then when the delta reached 86, roll the strike to 70 delta again (there is no magic in the delta numbers they choose, and you should figure what is best for you). As tommcginnis points out, it will be better if you look at what fits your trading style. --
As beerntrading stated, "There is so much to that question I'm not sure even where to begin."
There are multiple ways to approach this so just some brief mention:
1) Close position, book profit
2) Roll calls up to pull out some gains while still participating in the upside
3) Convert to a vertical spread, reducing cost basis by the amount of premium credit
4) Buy a put which creates a strangle and locks in the difference b/t strikes (assumimg put strike is higher than long call strike). Now you participate in both directions.
5) Short shares but less than 100 per contract (somewhat similar result to #4)
It all depends on your outlook for the underlying, going forward.
There are multiple ways to approach this so just some brief mention:
1) Close position, book profit
2) Roll calls up to pull out some gains while still participating in the upside
3) Convert to a vertical spread, reducing cost basis by the amount of premium credit
4) Buy a put which creates a strangle and locks in the difference b/t strikes (assumimg put strike is higher than long call strike). Now you participate in both directions.
5) Short shares but less than 100 per contract (somewhat similar result to #4)
It all depends on your outlook for the underlying, going forward.
you could also sell a percentage of them, to gain back a percentage what you put in, keeping the rest in to possible more move up..
I usually just close it when I've hit my mark though, I hate mass amounts of options to scroll through
I usually just close it when I've hit my mark though, I hate mass amounts of options to scroll through