2024 is off to an excellent start in my Cabot Options Trader portfolios, as we have multiple triple-digit winners on top of a handful of excellent double-digit gains.
But identifying promising options trades is only half the battle. The other element is successfully managing those options trades.
And as much as I’d love it if every trade I recommend were a winner, that’s simply not the case. I’ve had my share of stocks that look great heading into earnings that just fall flat.
So, if not every trade is going to turn into a winner, what can we do to maximize the impact of those that do?
In the Cabot Options Trader portfolios, I employ a system that’s set in stone for managing the trade.
Maximizing Profits on Winning Options Trades
I sell a third of my position at a profit of between 20-30%.
I take profits on a second third of my position when I can lock in a gain of between 60-100%.
And finally, I let the remaining piece of my trade run as high as possible.
Taking partial profits as my system dictates has its ups and downs, and I have a love/hate relationship with it. However, over time it’s proven to be the best way to manage winning options trades. Here is one example …
When we took partial profits of 24% on a third of one position, the stock raced higher in the weeks/months to come leaving the balance of our calls with a potential profit of 500%. It kills me that we weren’t holding a full position.
But recent volatility around a handful of leading stocks is exactly the reason that we have these rules in place. When the market comes under pressure, if we didn’t have partial profits in the bank, I might have sold out of our positions for fear of deeper losses.
However, because we have a system of taking partial profits at 20-30% on the first third, and then 60-100% on the second third, we are able to ride out the short-term weakness. And that patience is rewarded if and when that short-term volatility passes and those leaders resume their uptrends.
The other way I manage these winning options trades is by using mental stops and by raising that mental stop as the stock moves higher. For example, as the unnamed stock raced higher, the calls that we bought for $4.46 were worth $15; in that case, I might set my mental stop at $10. Then when those calls were worth $20, I would raise my stop from $10 up to $15.
Big picture, if we have a system that we stick to, I/we shouldn’t second guess taking partial profits, or if a mental stop gets triggered, even if it turns out to be the wrong move in the long run.
And finally, because the Cabot Options Trader portfolio has so many big winners in the portfolio, this month we bought a hedge via a buy of a Nasdaq ETF (QQQ) put that will protect our gains through the Presidential Election. To learn more about that hedge, as well as the Cabot Options Trader system, click here.
