Invest and Trade Profitably with Jon Johnson

On some of your plays you are taking some profits before the target stated when the play was entered. Does that mean you feel the play cannot continue with the uptrend? I notice that you often take a partial gain and that leads me to believe you still think it will move higher. Can you explain why you do this?

August 30, 2000

Depending upon the kind of market we are in, our strategies can shift to accommodate any changes in movements that stocks tend to have. For example, if our usual strategy with options in a steady market is to let the play run until our stated target is hit and then take money off the table, if the market changes we may want to take some of the gain off the table. Say a stocks makes a big, strong move; that often leads to a test. If we have options we like to take some of that big gain because of the time decay in value. That way we have banked a nice gain and can ride the remaining positions through a dip. We will do it on our stock positions as well. Or say the market softens in the direction we are playing; best move then is to shift the strategy and take some gain. That prevents tying up all our money in the position if a modest weakening grows stronger. We also have money to put to work elsewhere or back into a leader once that pullback is over. The recent move was solid but it was on lower overall volume. That is why we have been taking interim gains. Again, we can always add more positions to the existing ones after a successful test, averaging up into a winner with money already in the bank from prior gains. Or we can let the stock continue to run without adding positions at all.

This is simply good money management in this market and indeed any market: we bank some of our gains and then let the stock run. If we really like the stock; i.e. it’s a continuing winner, we can add to positions on a successful test. A test simply means that the stock has made the initial run that we thought it would, then takes a breather: it comes back with some mild profit-taking (mild means that the pullback is on low volume, not rising, strong volume and holds at a support level such as the short term moving averages noted above). Once it holds the support on low volume, it can move higher again, preferably on another surge of strong volume that pushes the stock back over the previous high. That’s a successful test of the initial breakout run that we had expected.

Taking some profits earlier doesn’t mean that we don’t like the stock, or that we don’t think it will hit the original target. It’s simply a point to lock in some gain given the near term action before letting the rest run longer term toward the other target.

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