Locking In Gains
Updated: Jan 12, 2021
Professional traders don't allow their profits to vanish. If you are in a winning trade, that reached your 2R profit target, you must never be in a scenario where you are giving back all of your profits.
If you haven't seen Ken's brilliant 2R Battle Drill at least 100 times, then I suggest you start right now:
As an options traders we can expand these ideas even farther and use options in order to manage our 2R battle drill.
If you already gained profit but still want to LET IT RUN, as the chart suggest that it just begin the trend you were hoping for, then by buying puts you can both Lock-In some of the gains and also give it a chance for unlimited gains.
This kind of profit protecting takes out all the stress to try to decide when to get out, usually at a falling market, which can be bad for your emotional bank, and cause you to do mistakes.
Let's look at the following trade example of Walgreens Boots Alliance (WBA).
WBA stock was in a big down trend for the last 2 years. The Covid-19 virus, didn't help as they had to close stores and the stock went down from 60$ to 35$ only this year.
As a value play, hedging against other momentum positions, I decide to buy on September Calls 35 to the January expiration. The Calls which cost 3.28$ at that time, were to break-even at 38.28 until January (keep in mind that you don't get dividends along the way) which seems reasonable, given the timeline for the vaccine trails to be announced (Nov-Dec). My first target was around 45$ , which was a 2:1 R:R ratio .
As PFE and BNTX announced their first results and the value stock emerged and started to go north WBA jump up too.
Next as MRNA announced today their results and the value stocks kept on going up, I was already up 2R.
At that point, the easiest thing to do is to fell in love with your position and let hope carrying you up.
The more professional way is to lock-in gains, without limiting your upside, as the trend seems to be very strong. This way, I can take my chips off the table, increase my account free margin, locking some of the gains, but still also position myself to enjoy the fields of catastrophic success.
It also allows my psychology to be tuned and free if the market will go down suddenly, and that way I could find more opportunities without being tied or paralyzed by the vanishing profits.
Banking profits in your emotional bank can accumulate just as much as trading profits. Don't allow winners to become scratch or losers.
GO WBA !
Follow up - the next day Nov 17th:
Amazon moves to disrupt pharmacy space with "Amazon Pharmacy".
Walgreens and Rite Aid are tumbling.
Do I need to do anything? No.
Do I feel any stress? No.
Was I lucky? I wouldn't call that luck.
Do I think that I traded this professionally? Yes !
Still have 2 months to go. Lets see what the market will give me.
Jan 11 2021 update:
On Nov 19th as the market went down I could sell back the put42.5 and stay with long Calls again:
Next on Jan as the WBA started to go up I could lock-in gains again by buying puts as it goes up:
Still have a few more days to let it run...