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Tales of a Technician: Why I Take Partial Profits

July 26, 2017

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Tales of a Technician: Why I Take Partial Profits

I had the ultimate pleasure of joining Coach D yesterday for the coaches show. We rocked an entertaining discussion on our recent trades. There were a few questions I wasn’t able to address due to 8 o’clock arriving to spoil the fun. So let’s take a look at the queries for today’s tale.

Why do you take partial profits on a credit spread?

The short answers are because 1) it increases my profit per day and 2) it increases my probability of profit.

Let me use a trade I entered today to illustrate. FCX scored an epic breakout yesterday making me a buyer of any and all dips. This morning’s pullback provided just such an opportunity so I sold the Aug $14 put for 34 cents. Expiration is 23 days a way and the initial margin requirement was $410. That means the potential return on investment is 8.3% (34/410).

Now, if it takes me the entire 23 days to capture the $34 reward then my profit per day is $1.48 ($34/23). I can pat myself on the back for having squeezed every last penny of profit out of the trade, but it took me the entire 23 days. Now, what if I could capture half of the $34 reward in one day? What if, due to FCX bouncing back from this morning’s selloff I could buyback the put for 17 cents? What would my profit per day be then?

You guessed it – $17. Isn’t that better? Is making $17 in one day better than making $34 over 23 days? Sure, $34 is more money than $17, but that’s not a fair comparison. Remember, if I exit the trade today with the $17 then all I need to do over the next 22 days is make more than $17 to have an overall profit greater than $34.

Does that make sense? Let me say it another way. I just took $410 and generated a $17 return in one day (probably due in part to luck). Should I keep that $410 invested in the current FCX naked put for 22 days longer to capture the other $17 (of the potential $34 max reward)? Or, should I close the FCX position, free up the $410, and deploy that money elsewhere in an attempt to make more than $17 in the next 22 days?

I’m pretty confident that I can make more money by closing and redeploying. Incidentally, the FCX put is sitting at 19 cents right now. I have a closing order in at 17 cents, but if it doesn’t hit it I still may exit by the end of the day.

In sum, the first reason why I take partial profits is it increases my profit per day over time. It’s a no brainer if you make a large chunk of the potential profit quickly.

Now how does it increase my probability of profit?

Let’s use Boeing as an example because it just exploded today. Suppose you want to be a contrarian since it’s so overbought and sell a Sep $240/$250 bear call spread for $1.40. To win at expiration you need BA to be below $240. The 240 call has a 23 delta which suggests there is a 77% chance that the call will expire worthless at expiration. That is your probability of max profit at expiration.

But what if my plan is to buyback the call spread for 70 cents? That would be 50% of my max profit. If there’s a 77% chance that the call spread will drop in value to zero, isn’t there a greater than 77% chance that it will drop in value from $1.40 to 70 cents at some point between now and expiration?

The answer is yes. Maybe it’s 80% or 85%.

And that is why I like to take partial profits. It increases my win rate.

Capisce?


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5 Replies to “Tales of a Technician: Why I Take Partial Profits”

  1. HIROABABON says:

    As usual, I learned lots from this and will apply it. Thank you.

  2. terrywallen says:

    Thanks also for the great Coaches Show last night

  3. CHUCKHAUGER says:

    Thanks Tyler! Great coaches show and I’m really liking the Iron Condor for Cash Flow course. This is s great course and it’s good that it is broke up into smaller chunks. I’m already adjusting my condor trading based on the course.

  4. RichardBlanchard says:

    I have been using this strategy since you first mentioned it a while back. Wow is it great. I made $30 on a potential $66 TLT Bear Call in 2 days for an APR of 912% and $34 on a $70 XBI Bull Put in 12 days for an APR of 172%.
    It’s the same strategy Walmart introduced to Retail turning over their entire revenue many times each year by selling for less on each transaction. I Love it! Thanks Tyler.

  5. robertbruceshannon says:

    Good Stuff

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