Once a stock has broken out (e.g., through a critical level of resistance) and you have made some profit on the move, what guidelines do you use to sell and take your profit? It would be nice to be able to follow your advice on exit as well as entrance criteria. (February 12, 2001)

  Many times we let the manner in which we played the stock, options or stock, tell us when we will take profits. In the simplest sense, we tend to take profits on options trades when a stock's breakout move starts to slow and roll over. We move up trailing stops behind the play in case of unexpected weakness, and then when we see it starting to roll over, we will go ahead and sell. We may be wrong and miss a brief pullback and run back up, but in the type of market we are seeing, we would rather take the profit in hand than see if the stock is going to recover after the almost inevitable pullback to test the move. We say 'why not take the profit and play the test if it successful?' As options are wasting assets, we will take profit first and play it again rather than ride it down in this market.

On very strong breakouts, i.e., powerful volume such as SDS' breakout over several days, that shows institutions are still buying after the breakout. There will be some profit taking before too long, but the volume on the buying shows massive support. Thus, we are willing to ride it back on a test as long as the volume remains low. We may even sell half the position to lock in some profits if we are uncomfortable, but on this move we will most likely hang on as SDS could be a real leader. We will watch if it can make a quick 20% move; that is an indication a stock could be a long term winner. If volume is not that strong on the breakout, we would tend to lock in profits after the breakout tends to top. There are not fixed percentages, though some around here use 20% gain as a rule of thumb. In a weaker market, not a bad idea. The key on stocks such as SDS is to watch volume; if it starts notching higher on selling, we get out. If support holds and it moves back up on stronger volume once again in a successful test of the breakout, we can get back in.

In short, where and when we decide to take profits depends on the type of position we took, the strength of the breakout, and the condition of the market. Some big gainers from the summer (SDLI) broke out and powered ahead, but when the overall market started to fold, SDLI started to sell down as well on higher volume. That combined with a weakening market showed the move was over.


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