The thread on how to lock in profits made me think of the conundrum one faces when a long position is well in the plus. When I trade directionally I tend to buy options a ways out in time 8m-1y more or less and - rule of thumb - as far out of the money as the market expectations appears to be based on the ATM price. E.g. I want to go long XYZ which is trading at 100$ - I look at the DEC 18 options and find the C DEC18 100 which is priced at 15$ - I would then buy the C DEC18 115 option of XYZ. So far so good. Now fast forward and lets say things are going rippingly well and our stock is trading at 130$ obviously the position is in the profit, deltas have increased and the relative weight of the position in my portfolio has shot up. Lets for the sake of argument say that whilst I may be uncertain of the stock's short term direction - a pull back is never excluded - I have reason to remain bullish for the longer term. However fear and greed gnaw at you when you see the position, you dont really want to let go but you are also afraid that all that lovely profit might evaporate and you wind up with a mediocre position (this happened to me in a position IRBT this year). What is the best way to lock in the profits according to the board. To make the example a little bit more live let me give the current situation on two positions where I took two different strategies: on 9/25 I purchased 3 C SQ JAN19 30 @ 4.90 currently trading @ $21.55 - the delta is practically 98% and the position originally worth only about 1500$ now weighs in at 6000$ on 11/2 I purchased 2 C YY MAY18 95 @ 9.50 - probably spurred by the meteoric rise I decided that here I wanted a different strategy. So I sold @ 21 on 11/15 and did a delta neutral purchase of: 3 C YY MAY 18 120 @ 10.50 that netted me also ca. $1130 cash. These options are currently trading @ 17.75 The previous position trades @ 31.75$ so comparing: YY OLD position if HELD - profit $5307 YY new position - profit - profit $ 3305 (this includes the netted cash) I didnt back check what would have happened on SQ but I presume that despite purchasing a delta equivalent position by increasing the number of options the return would not be the same. The difference is the gamma, so clearly my approach on the YY position was not optimal. On the other hand when I Iook at the SQ position as much as I like the stock I do get vertigo not to mention that huge chunk of my portfolio hanging on a speculative stock. So what is the optimal strategy here it being a given we want to stay in, reduce exposure a bit but preferably sacrifice as little (or nothing) on potential upside? Would it be possible to devise a purchase that would be both gamma and delta neutral without retaining the problem that a huge downswing hurts given position size?
It may be prudent to consider your "greed" level, and your "risk" tolerance a bit more closely, to aid in "dialing in" a strategy that best fits your personality/important factors. Both sides "greed/risk" may be equally important. For me personally, I try to balance "risk capital" (attempting to keep it in control), granularity of adjustments (ie... roll up your long call to delta==x, when delta exceeds y), considerations for time remaining in your option (consider closing position, or rolling out in time if DTE<20). One can consider modification of the strategy once your position is playing with house money if that is your thang (typically, not the best algo IMHO). Rolling the Calls up/out, has some similarities to a trailing stop, yet you do NOT exit, but take money off the table on up-moves, which is more profitable IMO. -- I began using entry delta of about 70, with the delta trigger for a roll of about 86, which worked fairly well. I now move the entry delta to OTM for the lower IV premiums when I have more confidence on the obtainable price movement. -- Seems to be working fine, but not enough data to confirm.
that's because the underlying reasons of getting into position are mostly based on gut feelings... one should know how to define trends, where they start, how they end, and also usage of s/r... then there is nothing to be afraid off... also the this notion of locking the profits is the wrong one.... lets rephrase it: one wants to run away with money, why run away? because he is afraid, afraid of what? of what market can do to him (take his money), why? because he does not know, does not understand what market is doing.. because he is lost...
You are mistaken if you think I enter a position on gut feelings. I tend to follow two things either momentum or a value when I go long. When I mention fear and greed I simply express the human feeling noone is totally immune to regardless of how objective and rational you try to be. Apart from that - I am quite disciplined in not having a position grow beyond my level of comfort. However that is something for another post
Think as a hedging alternative of a ratio as opposed to the outright put. Sell the ATM and use the proceeds to buy two OTMs for as close to free as possible. In essence, you increase you loss for small moves but keep all the upside. It will hurt more on a little moved down, but won't impair your performance on the move up. Another consideration would be an exit and just replace with a call - which is really just a hedged long. Different costs and tax issues - but choices to consider, Don't become cavalier just because you have a material profit, Every hedge has some outright cost or implicit cost. Lots of choices. Call spreads against the stock, call spreads as a replacement.
The best way to lock in profits involves knowing what the underlying will do going forward and no one knows that. Risk and reward go hand in hand. IOW, if you want something, you have to give up something. For example, if you roll up your profitable deep ITM calls, you give up some net delta. Profit booked, risk reduced, while retaining upside though it's reduced. Want some of that delta back? Add an extra long call at the higher strike. You can make other adjustments as well. After the run up, you could buy some puts, creating a synthetic. You could collar the DITM call if you wanted a different spectrum with limited R/R. My two cents is to adjust to how you are feeling it after a run up and fuggetaboutit. Perfect is the enemy of the good so stop looking back at what you could have done had you had done something else. Accept what you did do. That's optimal :->)
This is the strategy I have followed in the main. Except I will usually transact for a credit so as to reduce exposure - this has cost me profits at times but it avoided the problem that one position balloons to 10-20 or even more percent of the portfolio. Taxes fortunately play a minor role, I am Dutch and live in Belgium. Neither country has capital gains tax.