The market has been a volatile beast and there are no signs of that slowing down especially with the election on the horizon. This post will not only be an eye-opener to some but will also remind others of something they should already be doing: Set up a profit taking order as soon as you enter a trade.
Make It Easier
Using these potential profit taking orders can make things a tad easier for an option trader, and it’s also just plain smart. If you have an order in place, you might get filled when you least expect it, like first thing at the open when the underlying is at its highest point of the session. Without the standing order, you might have missed it. In addition, you might have noticed there is a psychological aspect to trading. Having a standing order in place can help eliminate the emotional demons inside most of us.
Buy and Sell Limits
It is pretty simple. For a debit position, a sell limit is used. For example, let’s say an option trader bought a bull call spread for 2.00 with a max profit of 3.00 ($5 spread). If he wanted to place an order for 50% of the max profit, he can enter a sell limit order of 3.50 (2 + (3 X 0.50)). It makes sense to use a Good-Till-Canceled (GTC) order too. If an option trader sold a cash-secured put and received a credit of 1.60, he may want to buy back the put once the premium has dropped 75%. A GTC buy limit of 0.40 (1.60 X 0.25) could be used.
Finally
As I like to tell my one-on-one and group coaching students, trading is difficult and if there is a way to make it a little easier, why not? To me, placing profit-taking orders is one of those ways and it helps reduce the psychological stress of trading. In addition, with these wild swings, if we have an order out there already, we might just get it triggered without even knowing or doing anything in addition.
John Kmiecik
Senior Options InstructorSenior Options Instructor
Market Taker Mentoring, Inc.
