For me it is the hardest part of trading. I found it difficult to manage sudden reversal of trends. I needed big wins to balance out all the small losses but often a big win became a loss at the end of expiration (options). One time you sent me back to McMillan to read up all the possible ways to manage profit. It was hard in practice. Any suggestions other than accept randomness.
Trades should always be entered "all in" and exited "all out". Thus there is not time when you would start thinking about taking "some" profit.
ironchef, I guess my approach is to try not to manage it too much, not because I'm lazy, but because I don't think it helps with what I am trading. With options, one often has to give something up to get into a more secure position, and repeatedly giving things up might not be worth it. I have to consider whether my system is one that benefits from taking small profits here and there. I don't tend to trade things that do well that way, so I have more of a tendency to let things run. On a trade with a limited return such as a spread, yes, I may take profit at 90%+ of the possible profit. But on a trade with unlimited return, I usually let it run. For example, I like to trade DITM long calls--so deep that they have virtually no theta or vega. On the few occasions when they go to the moon, I want to be there. And yes, I have sometimes seen all or part of my unrealized profits disappear. But if backtesting shows me that I am better off in the long run by sitting on my hands, I must manage my trades by ignoring them for a while. When tempted to micromanage, I focus on some other work, go outside for a walk, or turn my attention to the endlessly entertaining political news in this country. It is reasonable to take a small profit if I think conditions have changed with respect to the underlying or the market, so that I am now wrong. However, taking a small profit because I am scared is probably not a good reason. I know I will always be concerned that my profit may evaporate, but that's part of the game. I find it's best to try not to get bogged down in the intricacies of position adjustment. I think a better stance is to focus on the big picture (what I think about the underlying). With options, one can sometimes take very large losses. Therefore, I need some large profits, too. If the prospect of a loss or the fear of losing an unrealized profit is too worrisome for me, I think that means I should be trading smaller positions. I have had to learn my risk tolerance (the hard way, like most people do) and how to trade accordingly, and I had to train myself, one trade a time, to follow a set of rules. It's funny how much harder it can be to do nothing than to do something. Now, that said, I am not much of a countertrend, contrarian, or swing trader. Rules may be totally different for these approaches. I can't be helpful there; I guess trading that way doesn't suit my personality. Trading is a little bit addicting. Until the addict admits that he cannot drink or take drugs in a responsible way, he will continue his harmful behavior. Until the trader admits that he does not know the future, he will continue to try to convince himself that he can guess what will happen next.
An interesting and valid concept as it takes all the guess work and indecisions out of the equation. In a sense, if your trading methodology calls for taking a trade to expiration you should not muck with it. Thanks for the comment.
Well, this "all in" and "all out" thing is partly a personality characteristic, and also depends on what you think about the UL. I am generally an "all in" or "all out" person, but I don't think it's the only way to trade. It just depends on your system and your assessment of what you are trading. I used to attend an options trading group with a lot of bullish people doing credit spreads on SPY, IYR, and stuff like that. I would talk to them about long calls, but they wanted to do spreads despite their strong conviction that the market was going higher. My question to them was always, if you are so bullish on the UL, why are you capping your profits? They never had a good answer for me except for the need to cap their losses. But the truth is that when you buy an option, you are already capping your loss. It's when you are less bullish on the UL that you might need the spread. You want a more balanced risk/reward scenario and are willing to accept only a little profit, because your assessment tells you that a little is all you are likely to get. If one is more neutral, one can split the difference and sort of do both. For example, if I plan to put $1000 work in a certain way this month, I can split it into $250 portions to be used each week. This gives me an opportunity to set up a slightly different trade each week, depending on market conditions, without taking on additional risk. This may be a useful strategy when shorting volatility, for example. But if I am really bullish or bearish on the UL, it may be that hedging of bets is not a good strategy. For example, even if the UL is at an all-time high or low, I should realize that this might be the best price that will ever again be available to me. In that case, why wait until next week, or even tomorrow?
From what I learned at ET and some of the posts here, if I have a limited loss and unlimited gain option (long), I should probably let things play out as my loss is limited. However, in a limited gain and unlimited loss situation, as some of you folks (Maverick74 for example) correctly pointed it out: Gamma and delta can kill if you are short, on margins and not covered. And I have scar tissues to prove it. In such situations folks say risk management is paramount. But what exactly is risk management? Cut your loss? Different posters seemed to have different definitions and opinions. So, some coaching would be greatly appreciated. Best to you all.
I never 'take profit off the table'. If the company is no longer worth holding, I'll reduce my position. If I expect with strong conviction that a company is significantly overvalued (2x+), I'll reduce my position. If a position in my portfolio is more overweight than it should be, I'll reduce the position as part of a portfolio re-balancing effort. The fact that it has gone up 20%/30%/50% is immaterial initself. This effects other factors and those are the factors I judge by.
Risk mgmt can involve stops, hedges, or purchasing wings. But the best risk management is to set some rules in advance, and those should include how much you will risk. Best method is not to get too big in the first place. I look at my portfolio and consider the most wicked scenarios: 1987, or Sept. 2008. Am I positioned so that I can tolerate such events? If not, need to rethink my rules.