Active-Trader - Flip at Extensions

Welcome back active traders and loyal blog readers.

One of the things I found difficult in my early days of trading options was when to take profits.  Its a completely different mentality from stocks where - when a stock goes up - the last thing you want to do is sell it.  Instead you want to hold onto it for it to go higher, right?

When trading options, you need to have a different mentality as follows.  Once a setup occurs and you enter a position, you need to pick a target and take profits when it gets there.

Case in point is Zillow.  Recall the week before I took profits from the move up from 118 when it hit the fire at 124.  The stock quickly pulled back from there.  But just a day or 2 later, the stock was right back up to the fire line so I went long the following Friday 120 calls at 6.20.  I figured the stock would make it at least up to the 128 area so I took profits when the option reached 9.0 which was well short of the snow line at 132.76 but still a decent profit.

As it turns out, Zillow went much higher - further and faster - than I expected.  And notice how it ran right up to the snow line at 132.76 (almost to the penny) then pulled back.  It close out the week at a new all-time high and I would have gone out long some calls but I was too busy doing my regular job to be on the case at the time.  As for further levels in Z, we have the next snow line up at 137.89 and the next tree line up at 147.54.

SCTY was another case in point.  I got involved on Tuesday this past week after that huge bull elephant bar.  That bar was the largest daily range and daily volume in months.  So I went long the next Friday 50 call at 14.95 which corresponds to a stock price of about 65.  The stock sold off the next day and stalled a bit, but eventually headed higher and I took profits when the option hit 18.  I did not expect the stock to reach the tree line by the end of the week, but it did and almost to the penny!

You might look at that chart and say - what's the big deal - you drew these lines in retrospect right?  Wrong - I knew these levels ahead of time and that's the whole beauty of voodoo.  You know where to take profits on spikes into extensions.  It is at these moments of maximum exuberance and confidence by the market participants that you want to unload your positions.

As for next week, I have long positions in NFLX and CMG and I am expecting to see higher prices ahead in both positions now that we have cleared monthly options expiration.  Recall that option expiration tends to keep a lid on things and once the expiration passes, stocks are often free to run up to the next level.

Have a great weekend and a great trading week ahead.