Should I end the position of a profitable long call option?

[Ted Mosley]

Guys, I have consistently find it hard to decide whether or not to take the profit or not when I trade options. How do you guys make up your minds? Is there a good read or general rule to that one can share?

My current situation as follows:
On 9 Nov, I bought a FTCH230120C40000 for $17.
Now it's worth around $28.
Since I believe there will be a 5-10% drop in the market in the next 30 days, I am closing my other positions. But I like this stock particularly and am afraid of being wrong about the market.

Please help.

 

[postman]

Guys, I have consistently find it hard to decide whether or not to take the profit or not when I trade options. How do you guys make up your minds? Is there a good read or general rule to that one can share?

My current situation as follows:
On 9 Nov, I bought a FTCH230120C40000 for $17.
Now it's worth around $28.
Since I believe there will be a 5-10% drop in the market in the next 30 days, I am closing my other positions. But I like this stock particularly and am afraid of being wrong about the market.

Please help.

A 'trade' consists of
A reason for entering (technical or fundamental), and a place to exit.
If you didnt have those set up in advance you're not trading you're gambling.

Ask yourself what was the reason for entering the position, and is that reason still valid. If it was "Stonks only go up" hold till expiry. Otherwise ...

Investment Entry Point Definition and How to Optimize

Entry point refers to the price at which an investor buys or sells a security.

www.investopedia.com

When and How to Take Profits on Options

Buying undervalued options (or even buying at the right price) is an important requirement to profit from options trading. Equally important—or even more important—is to know when and how to book the profits.

www.investopedia.com

Next time have the answer BEFORE you enter the trade.

 

[tomorton]

Exiting a profitable position is the hardest decision in trading. I'd always prefer to get out early and watch for the expected price weakness to allow a chance to get back in.

 

[Ted Mosley]

Thanks Postman. I entered this trade based on a news of this company will start out news business with other e-commerce big names. I have no clues about the size of potential growth but I am sure this company will grow over the coming years.

Therefore, I tried to buy 1 lot of the stock. Yet, I lacked cash. So, I bought the said option instead.

 

[Ted Mosley]

Exiting a profitable position is the hardest decision in trading. I'd always prefer to get out early and watch for the expected price weakness to allow a chance to get back in.

Yes. And I tried to do that too. But got cold feet every time for fear of not able to find a chance to buy back at a better price. Hence the postponement till now.

 

[postman]

Thanks Postman. I entered this trade based on a news of this company will start out news business with other e-commerce big names. I have no clues about the size of potential growth but I am sure this company will grow over the coming years.

Time is not your friend with options. If you're going to hold, then convert it to shares as soon as practical.

 

[tomorton]

Yes. And I tried to do that too. But got cold feet every time for fear of not able to find a chance to buy back at a better price. Hence the postponement till now.

Think of the trade in terms of risk. If you're out, there's zero risk. If you exit a winning position this morning, its statistically impossible this will share be the only opportunity today. And then there's always tomorrow.

 

[Ted Mosley]

Time is not your friend with options. If you're going to hold, then convert it to shares as soon as practical.

Thank you. Surprisingly, this thought never occurred to me. So focused on the options side.

 

[Ted Mosley]

Think of the trade in terms of risk. If you're out, there's zero risk. If you exit a winning position this morning, its statistically impossible this will share be the only opportunity today. And then there's always tomorrow.

Very true indeed. Thx!

 

[Ted Mosley]

Time is not your friend with options. If you're going to hold, then convert it to shares as soon as practical.

Thank you Postman. Your precious advice will be put into action. You make my day. Thank you!

 

[BeDutch]

Yes. And I tried to do that too. But got cold feet every time for fear of not able to find a chance to buy back at a better price. Hence the postponement till now.

Time CAN BE your friend depending on your choice of strategy. If you have a position with positive theta, the theta decay will help you gain value over time, albeit NOT in a straight line, and depending on how far away from the money your short option strikes are.

 

[BeDutch]

Very true indeed. Thx!

Postman, when you write " if you are going to hold them convert them to shares as soon as possible" I think you are speaking to a very specific situation, not common to option traders. You are likely referring to a Long Call, and possibly a call at or near the money where the extrinsic value is significant and thus vulnerable to theta decay. IF the Call is ITM or better yet DITM, the extrinsic value will likely be modest. The holder of the option should also if course take into account whether he has the margin available to convert to shares. The alternative worth considering us to convert the long call position into a debit spread or diagonal spread.