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How We Made 85% Last Week… and the Lesson LearnedBy Jeff ClarkMonday, August 21, 2006 Early in my trading career I used to get extremely frustrated if I didn’t exit a position at the absolute best possible price… if I didn’t take ALL the money from the table.
It didn’t matter how much money I made on the trade. If I didn’t get out at the “top-tick”, it ruined my whole day…
Then one day, many years ago, my young wife asked my why I was in such a foul mood after coming home from work. I told her how I doubled my money with a position I held for just 30 minutes… but if I just held on 10 minutes more I would have had a triple.
Gabriela gave me THAT look. You know… the look a wife gives her husband after he’s said something galacticly stupid.
“I don’t get it,” she said, “Last week you were angry because you lost money. Today you’re angry because you made money. Seems to me you’re going to be angry a lot in this job.”
After being hit across the forehead with that proverbial rolling pin, I stopped obsessing about getting the best possible price. And it’s made me a much better trader.
The fact is – holding out for the maximum profit actually costs you money.
You see, when trading options, the price of the option is largely a function of supply and demand. When a stock is moving higher, demand for call options on that stock far outstrip supply. That demand supports the price of the calls.
On the other hand, once the stock price has peaked and turned lower, then the demand for call options dries up. Traders rush to sell their positions and increase supply. This selling pressure can crush the option price in just a few minutes.
It is far, far easier to sell call options as a stock is moving higher and demand for the calls is increasing. Unfortunately, by doing this, you’ll never get the absolute best possible price.
But… you don’t want to shoot for the best possible price. You’ll almost always get a better price by selling a little early and leaving a little money on the table.
A good example of this is the near double my Trade of the Week subscribers scored on an Intel call position last week.
As I speculated in last Tuesday’s issue, semiconductor stocks were particularly strong performers last week. But after running up 8% in two days, I feared the big move in the chip stocks was a little too much too soon.
Consequently, I recommended selling the Intel calls for a gain of about 85%. If I held off for just one hour more, we would have doubled our money on the position.
But Intel was weak late in the day on Thursday… and weak on Friday. Traders who held out trying to get the “top-tick” were badly hurt.
The moral of the story? The next time you’re trading options, be sure to leave a little money on the table. Getting out of the trade a little early is much better than overstaying your welcome.
Best Regards & Good Trading,
Jeff Clark
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