Is it possible for you to be more specific about where we should place the stops? For me this is the hardest part of the buy/sell routine.

On stock purchases, we place stops 8% below our original purchase price (see SFA below). That way we lose no more than 8% on our stock purchases. If we get stopped out and then the stock starts to again perform as we wanted, we can get back in as we still have the money to trade. If we hang around, we may lose more and not be able to take advantage of other plays or the same stock. If we get a decent profit, we move up our stops to where we are comfortable. If the stock runs up 20% in the first week, we give it more leeway if it is on a breakout and the market is good. Stocks that move that well right off the bat on a strong breakout tend to continue a strong move as long as the market continues to do well. If the market is shaky, we are looking more short term, and will move the stop up to where we are comfortable at taking a profit.

There is no hard and fast rule at that point. If there is near support, we often place a stop just below that support. If not, the previous session’s low can be used. At this point, once you have some profit, it is more a personal matter.

With options, we often use 25% as a stop point. We give options a bit more leeway because of the wider spreads and the ability of market makers to jockey around with the price a bit more. If we have a really volatile stock, we may give it some more leeway, but when it hits 50% of what we paid, we sell for certain unless the market is rallying that day. We always say we would like to have 50% of all options we rode down, so we take it and move on to the next play.

On the upside there is the dilemma: do I take a good profit or let it continue to run and risk a pullback. Options are a wasting asset. When we have a good profit and feel we are going to get a pullback, we will often sell part of a position, maybe all. Then we don’t have to ride it down and back up, and we can play the move back up as well. We did that on some positions this last move up, and we wish we had done it on all positions right now. Still, at the time, the market was showing us what we wanted; that is why if it does not change now, we will have to get out.

The spread on options makes it harder to use trailing stops. A wide spread means it does not take much for a market maker to run the price down, take you out, and move the option back up. We keep it at $2 if we can.