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The Agony and Ecstasy of Locking a Profit

Published 11/12/2018, 01:04 PM
Updated 07/09/2023, 06:31 AM

In this article I highlighted a hypothetical seasonal play in crude oil. As you can see in Figures 1 and 2 – so far so good. The crude oil market sold off almost exactly in line with its seasonal tendency to be weak during this time of year (just don’t go thinking that it is an automatic thing every year).

Crude Oil Seasonality

Figure 1 – Crude Oil following annual seasonal trend Courtesy Sentimentrader.com

Now the example trade I highlighted in the original article has:

*A very nice open profit

*The potential to give it all back and more if crude rebounds

Example United States Oil Trade

Figure 2 – USO example trade with an open profit Courtesy OptionsAnalysis.com

One great thing about options is the ability to “adjust” a trade as situations change. In this example, it is not so much an “adjustment” per se, but rather more like “taking a lot of chips off the table.”

So here goes:

*Sell 7 Jan2019 USO 17.5 puts

This leaves us with 3 Jan. 2019 United States Oil (NYSE:USO) puts as shown in Figures 3 and 4. The good news is that we still have more profit potential if USO continue to decline AND we have now locked in a minimum profit of +$690.Adjusted USO Trade Details

Figure 3 – Adjusted USO trade details Courtesy OptionsAnalysis.com

USO Trade Risk Curves

Figure 4 – Adjusted USO trade risk curves Courtesy OptionsAnalysis.com

The Bad News

The one “quirk” is that – as you can see in Figure 5, which overlays the original position with the adjusted position – if USO does continue to decline the adjusted position will make a lot less money than the original position.“Original” USO Trade Vs. “Adjusted” USO Trade

Figure 5 – The “Original” USO trade versus the “Adjusted” USO trade Courtesy OptionsAnalysis.com

The Choice

So, the question comes down to:

*Do you want to lock in a profit and let the rest ride (albeit with less potential)?

*Or, do you want to play for the maximum profit?

As always, there is no “correct” answer. The key is to make your choice based on your best thinking at the moment – then let the chips fall where they may and NEVER look back in anger or regret.

Latest comments

Always take what casino give. Obsessively hoping for jackpot takes it all back :)
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