Lesson Overview

Taking Profits Before Expiration

Using a past video update for our members I'll cover a handful of option trades that I closed for both profits and losses plus some new trades we are entering as part of our December expiration cycle.

We'll also cover the reasoning as to why it's important to take profits on great trades before expiration in order to maximize your win rate long-term. Whenever we see a descent profit you need to exit the trade and bank the win - otherwise you can let the trade work as long as it takes to show a profit.

More Discussion

Was This Helpful? Add Comments/Questions

  • Definitely is a factor for sure. We want to know that it’s on the horizon when making a trade.

  • Yep in cases where you get close to expiration you have to make a decision to hold or close. When the position is far out and not likely to turn around in the next couple days we will close the losers and just simply move onto the next trade. Though I see your point in holding, only if a position is ITM will we generally close since we don’t want to be assigned.

  • Generally equity prices above $15 and high number of contract months available.

  • If you’re in the week of expiration then take whatever profit you have and move on. This podcast walks through this question in much more detail: https://optionalpha.com/options-expiration-week-22689.html

Show Video Transcript +

What I want to do today before the market opens (it's Friday, November 1st, about 9:09 in the morning) is go over some of the trades that we’ve closed out over the last couple of days, particularly yesterday.

We closed out a ton of trades before the market closed and then opened up a bunch of new trades. Of course, this isn’t all the trades that we make. These are just a select few that I’ve just pulled out of the alerts that go out to our members.

If you want to get alerts, obviously, sign up at optionalpha.com. These come out via text SMS message. But the whole key here is that I want to show you what it looks like as I’m starting to close out trades and I want to show a couple of losers in here too obviously to show.

What I look for when either deciding to roll the contract or not to the next month because I’ve got a lot of questions about, “Kirk, at what point do you decide to just take the loss on the trade or at what point do you decide to roll the contract possibly to the next month and try to keep the trade alive and get some more duration?”

I have a couple in here that I pulled out. There haven’t been that many this month. We’ve closed a lot of trades over the last two weeks, all been profitable.

And then yesterday, we started taking off a couple of losers that just haven’t turned around in the last couple of days here heading towards November expiration.

I’m going to go over these in compilation with a couple of the charts and then also go over some of the new trades that we've made over the last couple of days as well.

The first one I want to take a look at here is both the opening and closing order for LinkedIn. Interesting story: When LinkedIn fell, we sold a call spread above the market, the 230/235 call spread for a $1.95, so we took in $195 of premium.

And then just yesterday, we closed this back out for a very small profit of a couple of dollars, about $30 or so. And the reason that we did it is that LinkedIn finally tanked.

It had been running a pretty big loss and here’s the reason why you keep these trades alive until the end and let them run out and this market cyclicality start to take advantage of market moves coming back to a more normal distribution curve.

I’ll go to the chart here of LinkedIn and you can see that we’ve entered this trade at the beginning of October and it almost immediately went against us and had pretty much stayed with us the entire time that we had the trade on until just yesterday or the day before when it actually started to really fall here after earnings.

Did we know the earnings were going to be bad? No, we didn’t know. All we’re doing is making a good probability trade, and at this point, it’s just so close to November expiration that we want to take some profits off the table.

Amazon: Here’s a great example of why you just close out a trade and move onto the next one. In Amazon, we did the same thing early part of October, sold a call spread in Amazon, the 323/325, took in $1.37 of premium and then we bought it back yesterday for 490, so almost at a max loss, the max loss would be 500.

Here's the reason we did this on Amazon. Amazon had earnings in the middle of this whole cycle and had a huge move higher. I held this a little bit because it's near max loss. What’s the point of closing it early?

As soon as it makes that initial move, we still have some time left to go in expiration, so I held it a couple of more days, held it for about a week to see if maybe the market came down. We’ve seen a lot of other stocks that popped on earnings, but then quickly reversed.

Facebook being a prime example yesterday, popped aftermarket, but then it quickly reversed. At this point, your near max loss, you hold it and see what happens and ride it out. But now that we're getting closer to expiration, it seems that Amazon isn’t coming down.

This is not a case. Our strikes are down here in the 320/330 range, and the stock is trading at 360. In this particular case, it's not a good idea to roll this contract and possibly get more premium. All you’re doing is delaying the inevitable. It's a losing trade, you’re going to have these, so you close it out, and you move onto the next trade.

The next one we went into was IWM. IWM ended up being a pretty good trade for us. We sold the put spread below the market the same period around the beginning of October.

You can see that we’re spacing the trades out as far as our Deltas, we have some calls, we have some puts, etcetera. This one, we took in $1.20 in premium, and we just bought it back to the market yesterday for $.45.

Going to the chart of IBM, IBM obviously you can see where we sold it, the beginning of October right as it started to dip. It had a nice move up, that's exactly what we want to see, you’re not always going to get this.

But since doing that, implied volatility has come down with the stock moving higher, so we were able to take a pretty good advantage of that move and take a profit in. Same thing pretty much happened with Yelp, and that’s what we have here with Yelp.

Yelp sold very small call spread in Yelp for $.60, bought it back for $.15 yesterday after earnings. The key here being that earnings were not that great for Yelp. It did come back on the day, but it opened much lower on the day, and that’s where we sold the stock out.

Again, just a good move, you can see the stock has been strong, and we were just taking the opposite directional trade in the market and selling a call spread above the market.

AOL: Here's another one that was a loser that we closed out. Here's the thing with AOL. We sold a very small short call spread, meaning that our strikes are very close together, so 35/36.

We only took in $.35 of credit on this particular call spread, not a lot, but we kept our trade size small, there are only three contracts, so we're taking in a little over $100 or so, and we bought it back for about $200, so we bought back each spread for $.60.

And really, the whole idea here with AOL is that it wasn’t moving. This one is a candidate that you could've rolled to the next month, but at this point, the implied volatility is starting to get so high it’s better possibly just to reopen this trade completely as a new contract month for December.

This one just had a good move up in AOL right against our strike prices. It didn't move between now and then. Now that we’re getting compressed on time, it's better just to close out the trade altogether.

Finally, the last trade that we closed out that we’re going to go over here is BIDU. BIDU, we sold a vertical put. You can notice…

And I tried to harp on this as much as possible in coaching too, is that we have a pretty even distribution here of calls and puts as far as what we're trading in some of the larger securities, IBM, Amazon, LinkedIn, two calls, two puts, making it very neutral, so that some of the losers are overset by some of the winners, etcetera.

BIDU, while they’re profitable trade for us, we sold the put spread for $1.25, bought it back later on for $.8. This is what the chart of BIDU looks like right now. Obviously, you can see at around the beginning of October, that's when we sold it, on this big dip down in the market, implied volatility shot up.

Since then, BIDU has just run away from itself, and this has made our position very profitable. Implied volatility has contracted somewhat, so that helps with the premiums coming down as well.

Alright, let’s get into some of the new trades that we’ve made. These are not all the trades. All the trades come out to members only. These are only a select few that I pulled out just for example purposes here to go over.

The first one is that it seems that we had sold pretty much all put vertical spreads yesterday. This is not all the trades, so there are some other calls spreads that we’ve sold in there.

But the whole underlying theme with all of these trades that I wanted to go over that we've made over the last couple of days is that they’re all very close together as far as their strike prices, so 15/17, 38/37, 40/41, 22/19, etcetera.

So taking on very small risk per individual trade, keeping trade size small, but we also took in some good premiums for these prices as well, so $.65 on Pandora, ANF, we took in $.30, the DOW, we took in $.24 and UNG, we took in $.38.

Let’s talk about ANF first. This is the one that I think shows the biggest potential here. There’s a pretty good premium on this one.

But you can see right now that implied volatility on ANF is in the 76th percentile, so it means that over time, implied volatility should come back down significantly for this particular stock.

And since it’s had such a big run-up and we have this huge gap that it made back in August for its earnings, it only makes sense that we’re going to trade a call spread in this particular instance.

It really doesn't matter which side of the market we even trade, we trade a call spread or a put spread, but in this case, we’re just using a little bit of intuition and some commonsense thing and at some point, this thing has got to correct back to a normal distribution and more mean area of trading and right now, it’s a little bit overbought.

This is a little bit different than some of the other things like the DOW that we traded. Not the DOW, but DOW Chemical. This one, you can see that it obviously had a nice huge run-off and at this point, mean reversion, we think it might be going a little bit higher, so we’re trading a put spread on this one.

UNG obviously had a huge, huge move down over the last couple weeks, so same thing. We think at some point it’s going to stop and start to correct and head back up. Pandora, another one that’s had a little bit of a tough time here with earnings from a lot of the other internet and tech, etcetera.

So they’ve been crushed a little bit and moving from 29 to 25, so same thing. We think at some point that this big gapping window here might hold up and we’re going to make a nice little trade on this as well.

The whole idea with these trades that we put on here is that implied volatility is high, we’re making somewhat of a directional assumption just looking at the chart, no too much detail, technical analysis, but a little bit of commonsense here in directional assumption thinking that something is a little bit either overbought or oversold, etcetera.

The whole idea with these is obviously, hopefully, ride them pretty close to December expiration, let them compress a little bit, premiums get sucked out of it and then take them off for a nice little profit.

Hopefully this has been helpful for you guys. As always, please add your comments to the comment section below here and let me know what questions you have about the trades that we closed or the new trades that we opened. I like to answer those for you guys. And happy trading!

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