{ "media_type": "text", "post_content": "Can someone please explain to me the strategy on taking profits as a stock’s price rises? What does it mean, and how does one go about determining how much to take? Taking lesson to apply against stock like MGNI in the future. Am a long term holder but just felt like I missed out with stock going down a bit.", "post_id": "602f17fbec10d40021904cf4", "reply_count": 6, "vote_count": 2, "bowl_id": "5acc42208c6b52001375e11e", "bowl_name": "Option Traders & Investing" }

Can someone please explain to me the strategy on taking profits as a stock’s price rises? What does it mean, and how does one go about determining how much to take? Taking lesson to apply against stock like MGNI in the future. Am a long term holder but just felt like I missed out with stock going down a bit.

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You’re never going to sell at the exact top so don’t beat yourself up for missing that. There’s no right rule for this but a few different approaches: Cramer looks to get his cost basis out of the trade over time. He sells ~25% of the cost basis when the trade is up ~25% and the rest of the cost basis on a double. He’ll also sell a small bit of a stock has run up quickly and buy a little bit if he thinks a solid position is oversold. He often exits positions 5-10% off the high. Momentum traders may not sell out of a position except to exit all together. They often ‘give back’ a chunk of their highest open P&L number to give the trade a chance to recover. The HedgeEye approach to is get into a position and take small profits periodically at the price hits the top of the channel and buy back when it’s at the bottom. They stress having position sizes large enough that you can sell a chunk of it and still have it be meaningful. I tend to use an approach where I allocate a certain amount of risk capital to a trade and then lever up the position based on the distance between the entry price and the stop price. This gets me positions that are 3-5% of my portfolio. I Pull out that risk capital and raise my stop when the P&L is 2x the risk capital - this locks in a small profit. I may then trim the position another bit at a double. The idea is to keep pulling a little cash back to have dry powder. Another concept is max size in the portfolio. This depends on your risk tolerance and the asset in question. Many portfolio managers will trim positions that grow larger than 5% or 8% of the portfolio. This is to help ensure diversification. If BTC or MGNI is 30% of a six figure portfolio be sure you have good cardiologist and shrink.

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For options plays I usually sell half when it doubles to get a ‘free’ position. If I’m lucky the underlying will gap up and I don’t have to sell half to get the cost basis out. I’ve gotten a lot more selective on options plays and work more for good setups that have a reasonable shot at a 3-5x return based on the price chart.

Let's say you have 10 call contracts on a stock and the price of the calls double over a period of time before expiration. Let's say there is enough time for it to continue appreciating, but you want to lock in some profits. This could be your initial capital outlay plus some of the profits beyond that, so lets say you sell 7 of the 10 contracts, and let the remaining 3 ride. This would be a bullish form of taking profits. Another bullish form of taking profits might be selling all 10 calls and buying lower priced, further OTM calls with a smaller investment than the first one, or even the same size.

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Agreed

i just try to take 20-25% off of my current position at certain points like up 50%, 100%, etc

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