Imagine getting dressed for work in the morning. You button every other button on your shirt, pull on just one of your shoes, and put only one arm through your jacket sleeves.
Does something feel a little… off?
Of course, you’d never arrive at the office half-dressed. And in fact, we’re willing to bet that you’re the kind of person who doesn’t do anything halfway.
We live in a culture where we’re encouraged to go “the whole nine yards.” We’re expected to give “110%” effort — to “leave it all out on the field.” So it’s no surprise that the idea of leaving a task half-finished strikes us as unacceptable.
When you’re trading options, though, taking half-measures is encouraged — and it can actually help to boost your bottom line and reduce your overall risk.
There’s an investing adage that says, “You’ll never regret taking profits.” And hey, it’s hard to argue — what trader doesn’t relish the moment when a position pays off, and paper profits turn into cold, hard cash?
That’s why we’re big proponents of taking partials when we trade options.
In the simplest terms, taking partials (literally, “taking partial profits”) is the practice of closing out a portion of a trade once a satisfying preliminary profit target has been reached. By closing out part of the position at a respectable gain, you can lock in some of your paper profits — thereby reducing your dollars at risk, or even guaranteeing a breakeven or profitable result on the strategy!
Meanwhile, since the remainder of the position is still open, you can keep racking up gains as long as the underlying security continues to move in your favor. In this respect, taking partials is a “have your cake and eat it, too” approach to options trading.
Let’s say you bought to open 10 contracts of a call option at $2 each. Following a big rally in the underlying stock, your calls are now worth $4 each — double your original purchase price. You’re happy with the decisive move in your favor, but think the stock still has room to rise even higher. At this point, you could protect some of your paper profits by selling to close 5 of your 10 contracts — or 50% of the position — at a 100% gain.
At this point, you’re guaranteed to at least break even on the trade, even if the stock sinks and your remaining 5 contracts expire worthless. This is known as a “free trade.” You’re positioned to capture any additional upside, should the shares continue to trend higher — but your risk going forward is essentially zero.
The “free trade” is a picture-perfect example, but partial profits can be taken in any number of configurations. Depending upon how many option contracts you initially purchased, you may wish to shut down one-quarter, one-third, one-half, or even three-quarters of the position to lock down some gains.
Likewise, partials can be taken at any time you deem appropriate. Depending upon your personal risk tolerance and your ultimate profit target — not to mention how the stock behaves after you’ve opened the trade — you might decide to lock in some gains once you’ve achieved a return of 50%, 75%, or anywhere in between.
For example, let’s say you’re eyeing an overall return of 100%, but the price action starts to get choppy when your options are up just 50%. In this scenario, you might want to shut down half of the position early. Even if the shares stage a total reversal and you end up swallowing a loss on the second half of the trade, you’ve effectively lowered your overall risk on the position by taking that partial.
Plus, you haven’t really sacrificed anything — you can still participate in any future gains via the remaining half of the position. If the shares achieve your initial target, your profits will average out to a very respectable 75% (one half closed at +50%, and the other half closed at +100%). Or, if the shares continue to move decisively in your favor, you might opt to hold out for a 150% gain on the remaining half — which would net out to your initial target of a 100% return.
The essential takeaway here is that there’s no wrong way to take partials. Whatever your approach, taking partials lets you take control of your options trades. By actively managing your positions, you can lock in profits and limit risk like a pro!
Are you ready to learn the ins and outs of managing an active options portfolio? Schaeffer’sWeekend Trader Alert issues a new call or put recommendation every week — and each trade comes complete with detailed entry and exit instructions. Plus, all recommendations are based on our proprietary Expectational Analysis® methodology, which targets stocks that are poised for big breakouts.
Every Sunday at 7 p.m. ET, you’ll receive a new options recommendation. Each pick will be accompanied by an easy-to-follow recommendation and stock chart, allowing you to see exactly why we think that name is on the verge of an explosive directional move during the short term.
And you’ll never have to worry about the details, because we provide everything you need to manage the trade, including a target profit and time-stop date!
You’re never left wondering what to do — we’ll guide you every step of the way, so you can see exactly how a seasoned options player manages a portfolio with multiple open trades.
As a special “thank you” for choosing to begin your options journey with Schaeffer’s, we’re offering a special deal on Weekend Trader Alert right now. You can take advantage of our powerful full-service recommendations at a huge savings to our usual prices if you claim your place within the next two days!
Normally, Weekend Trader Alert retails for $149 per month, given the volume of trades and the ambitious target profits.
But as a special “new members only!” offer, you can trial a full month of these fan-favorite trades for just $10!
If you didn’t create an account using this email address, please ignore this email or unsubscribe.
To ensure delivery of this email to your inbox and to enable images to load in future mailings, please add enews@schaeffer.com to your e-mail address book or safe senders list.
Although there is significant profit potential associated with buying options, there is also the risk of losing one’s entire investment in any individual trade. In any option buying approach, it is expected that losing trades will be more numerous than winning trades. The goal is for the average gain to be significantly greater than the average loss so that the bottom line is profitable. Prior to purchase, ensure that you have a broker that allows the trading of options and that you are approved to trade options.
