The Complete Option Report

How to Take and Maximize Your Options Profits
by Ken Trester

Finding undervalued options is the cornerstone of making profits when you speculate with options.  But just as important as selecting the right option to buy and paying the right price is knowing when and how to take profits.

Many option buyers lose not because they take the wrong positions, but because they fail to take profits properly.

To make the biggest potential profit your first objective is to protect profits, and your second objective is to hit home runs.  Most important, when your option begins to profit you must be ready to act.

I have found that the best way to do this is to know exactly what you will do with a position when the option hits a specific price.

Deciding this in advance, and sticking to your decision when the time comes, removes a lot of emotion from your decision making.

When you buy an option, you should decide in advance what your target price for the option will be.

In The Complete Option Report we always give you our target prices when we recommend options to buy in our newsletters.

If the option hits the target price, sell half of your position.

This takes your original money off the table. Capital preservation is paramount when you speculate with options.

Then let the rest of your position ride for possible future gains, using a 5% trailing stop on the underlying stock.  A trailing stop can be a “mental” stop, though more and more brokerages are allowing this to be done automatically.

The trailing stop adjusts when the stock moves in your direction, and stays the same when the stock moves against you.

For example, when a Halliburton LEAP call option we recommended hit its target price, we advised subscribers to sell half their position. Then if the stock kept rising, they would hold the option and adjust the trailing stop higher so that it would still be 5% under the current stock price.

But if the stock fell, they would keep the trailing stop the same.

The process is reversed for a put option. If the stock continues to fall, keep lowering the trailing stop. But if the stock rises, keep the trailing stop the same.

Another key for taking profits -- if your option is in the money (goes past the strike price) and enters its last week before expiration, close the entire position and take profits.  Don‘t wait for it to expire.

2 Iron Clad Reasons

Taking half of your profits at the target price serves 2 beneficial purposes:

#1 It forces you to take some money off the table, protecting you from a sudden reversal in the stock price.

#2 It leaves money on the table for possible future gains. Protecting profits and preserving capital is critical when you buy options.

As important as taking profits is cutting losses. Losses are part of the game, and if you don’t take them and move on you will soon be out of the game.

How to Cut Loses

There are two ways to cut losses:

#1 Set a stop loss on the underlying stock. If the stock closes below (for a call option) or above (for a put option) its stop loss, close the option position the next day.

#2 Use the option price. If an option falls in value by 50% after you buy it, sell it and close your position.

We can‘t stress this enough -- if you do not cut your losses, you will not last as an options player.

That, in a nutshell, is how we maximize profits with options.

In Sum

It is a system that takes profits when they are available, and cuts losses when necessary. Most important, it removes emotions from your decision making.

Follow this system and you‘ll have your best shot at real success when you buy options for speculation.