Profit-taking advice

B

Bodrey

Hi All,

New to Options trading. I'm mainly interested in selling Credit Spreads and I'm looking for some advice from experienced traders as to what method(s) they use to take profits(?). Do you have a specific profit target that you use or does it depend on the strategy (i.e. Credit Spread vs Iron Butterfly)? Obviously, if I knew with 100% certainty that every Credit Spread I placed would expire worthless then I wouldn't ever bother setting profit targets and just keep all of the premium collected. Unfortunately, the market's not that predictable. Looking forward to hearing from you. TIA.
 
This is a rather broad topics and there is no perfect answer.

Some traders set profit target to take profit, such as 5%, 7% or 10%, regardless of the market. Some use technical signals such as moving average and other technical momentum signals. Some add volume and money management into selling or profit taking signals.
 
Bodrey said:
Hi All,

New to Options trading. I'm mainly interested in selling Credit Spreads and I'm looking for some advice from experienced traders as to what method(s) they use to take profits(?). Do you have a specific profit target that you use or does it depend on the strategy (i.e. Credit Spread vs Iron Butterfly)? Obviously, if I knew with 100% certainty that every Credit Spread I placed would expire worthless then I wouldn't ever bother setting profit targets and just keep all of the premium collected. Unfortunately, the market's not that predictable. Looking forward to hearing from you. TIA.
More...

Ever look at tastytool (tastytrade website). They have done extensive studies on what you should look for... the only thing I dont like with them is that they have some sort of profit target depending on strategy (like 25% of prem collected) but they NEVER ever take a loss at X%, and are willing to accept max loss on losers
 
OP, lets suppose you do weekly options, those option trades you mentioned ... credit spreads.

starting slow, least aggressive, work the number to see if you can get 1%/wk net after commission?

if you master that, then you basically achieve 50%/yr.

you could then move onto bi-weekly, even monthly - set your target return, go from there.

finding the handful of stocks/options, their IV, volume & open interest is part of doing this.

me personally 1% net/week option trading is right for me.

my trading is basic options - I do covered calls, cash covered calls/puts, infrequent spread trades.

in the past couple years I have been doing option trades one day before expiry, so for options expiring 9 April, I'll do options trades on the 8th.

case by case, trader to trader ... whatever works best for the individual, there isnt a one for all fit.

then there are the option day traders.
 
You should price your option to various payout scenarios. If you are doing credit spreads on calls, you're betting that the stock price will expire lower, so you are making a bet on the direction of the underlying asset. You should have a view on the stock before making a trade.
 
Bodrey said:
Hi All,

New to Options trading. I'm mainly interested in selling Credit Spreads and I'm looking for some advice from experienced traders as to what method(s) they use to take profits(?). Do you have a specific profit target that you use or does it depend on the strategy (i.e. Credit Spread vs Iron Butterfly)? Obviously, if I knew with 100% certainty that every Credit Spread I placed would expire worthless then I wouldn't ever bother setting profit targets and just keep all of the premium collected. Unfortunately, the market's not that predictable. Looking forward to hearing from you. TIA.
More...

The general consensus that I have heard is that you are supposed to close the position when you have made 50% of the profit.
 
I have heard this as well, but I haven't come across the reasoning for this on a long term expectancy basis.

Do you have any insight here?
Tnx!
T
 
I'm surmising that they feel there's no guarantee that a stock's price will go above (or stay above) the short strike (in the case of a Bull Put Spread) or go below (or stay below) the short strike (in the case of a Bear Call Spread). So, better to take some profits than none. Also, the closer it gets to expiry the greater the chance that the Option will get assigned. Not worth the risk to make a little extra profit(?)
 
Ah, that makes sense in terms of spreads vs a wheel strategy where you are looking for the option to expire or get assigned to designate the next action required.

Hmm ... maybe the Wheel squeeks a bit more profit on average by running to expiry as well as avoiding some of the bid/ask spread by expiry/assignment plus less management time? (granted the differences in risk)

Appreciate your thoughts!
T
 
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