Deal or no deal… that’s the question everyone on Wall Street is asking today. As of now, it appears all up in the air, maybe tariffs will hit or maybe they won’t.
But here’s the thing…
Stop worrying about stuff you can’t control and begin focusing on what you can control.
What is it you can control?
- How much you invest in a trade
- How many contracts or shares you chose to buy (or sell)
- How much you are willing to risk and make on the trade
Of course, it’s all about the trading plan you put together and your ability to execute.
You see, a couple weeks ago I placed a trade in Lyft with a specific date in mind…
Win…Lose…or… Draw… I was going to get out of the position because I didn’t want to hold it into the earnings release (which I always feel is a crapshoot).
Furthermore, I locked in my profits and got out of my Lyft options ahead of the release
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Now, this plan was pretty straight-forward. But sometimes trading decisions are a lot more difficult. And while knowing when to take profits is a good problem to have… it’s important you learn how to hold on to your winners and let them run.
Easier said than done right?
Well, if there is someone who knows about knocking down big trades it’s me. Read on to learn how I’m able to stick to the game plan and know when to take profits.
There’s one common trait that all successful traders share: knowing when to take profits. You see, struggling traders tend to hold onto their positions too long… often making excuses to stay in the position. For example, if they’re long a stock, and it runs up, they’ll think, “This stock could build momentum and break out.” Rather than taking profits when the stock is strong… chances are they stock pulls back and they end up losing a portion of their profits, if not all.
Now, for the most part, I like to take profits at 100%+. However, there are some times when I just focus on the charts and catalyst events to let me know that I need to take my money off the table.
That said, let’s get into a case study of one trade in which I took profits, despite the fact the options didn’t reach my target.
Lyft Inc. (LYFT) Options Trade Case Study
Now, a few weeks ago, I alerted Weekly Money Multiplier clients about an options trade in LYFT.
LYFT was a recent initial public offering (IPO) that got sold pretty hard. However, the stock found some support (an area where it’s had a hard time breaking below) around the $54/$55 level (LYFT made a low of $54.32).
So with the stock holding at those levels, I figured a good trade idea would be to sell $50 strike price put options (betting LYFT won’t get below $50).
Not only that, I thought the pessimism in the stock was done with Uber (UBER) conducting its IPO on May 10 (tomorrow). Since these two stocks are in the same industry, the hyped UBER IPO was one potential catalyst that could keep the stock above $50.
Sometimes, It Doesn’t Make Sense to Let It Ride…
However, LYFT was reporting earnings on May 7.
If you don’t know yet, earnings reports are extremely volatile events… you simply don’t know what the company could say. For example, they could announce a massive beat on earnings and raise guidance (which should send the stock higher)… or the company could come out and say they’re forecasting weaker profits for the next quarter or current fiscal year (which would send the stock lower).
It’s pretty much a coin toss sometimes.
Now, the options I owned included the earnings date (since they were expiring on May 17).
Well, that was one sign to take some profits off the table. You see, when you’re long options on a stock about to report earnings, you generally want to close or cover your position ahead of it. If you hold into earnings, it’s extremely risky, and you could lose all your profits (and then some).
When I was up just over 80% on those short LYFT puts… I figured it was time to take profits, the stock was reporting earnings, and it didn’t make sense to risk all that money on a 50-50 event.
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Now, some traders will actually hold onto a winner like this into a catalyst event… thinking they could make more money. Since I was short put options, the most I could’ve made was 100% (if the stock gapped up significantly… and the puts lost all their premium).
I wasn’t going to risk ~82% in profits to make another 18%.
Not only that, I was looking at the hourly chart in LYFT and noticed my money pattern.
Using Charts to Signal When to Take Profits
Here’s a look at the hourly chart in LYFT.
Now, if you look at the chart above, you’ll notice blue and red lines that track the trend of the stock. If you look closely, you can clearly see the blue line (13-period simple moving average (SMA)) was just starting to cross below the red line (30-period SMA).
Well, that’s a bearish signal… and it let me know LYFT could continue lower. Since I was short puts, if the stock continued lower, I would’ve given up a portion of my profits. So with the earnings announcement coming up and this bearish crossover… booking an 81.84% profit turned out to be the right move.
Here’s a look at how LYFT is trading…
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The stock broke the support level and got pretty close to $50.
Had I held onto that position, I probably would’ve given up all those profits.
Now, you also don’t want to be hard on yourself if the trade actually works out after you booked profits. It’s more important that you follow your plan. For example, I was long Roku Inc. (ROKU), but the company was set to report earnings (I booked profits before the conference call).
Despite ROKU being up nearly 20% after the earnings announcement, I’m okay with making the smart move and taking profits before the call… because the stock could’ve easily gone in the other direction.
The key takeaway here is to have clear signals to let you know when to get out of your positions. Having knowledge of upcoming events, as well as using technical indicators (like the money pattern), helps when it comes to taking profits.