One of the tougher choices an option trader faces is what to do with a profitable position. That’s a good choice to have, but it might not be an easy one. Our philosophy is always to let profits run. Therefore we use trailing stops, not targets. Targets only take you out of your best positions way before they have run their course. But even within the framework of using trailing stops, there are some choices to be made besides just raising the trailing stop as a long call position gains profits. Specifically, when should a profitable long call be rolled up or a profitable long put be rolled down – if at all?
Example: let’s look at an example. Suppose you bought XYZ Sept 35 calls at a price of 3.00, and now XYZ has made a good run to 41. Assume the 41 strike exists. Here are the current prices:
XYZ: 41 XYZ
Sept 35 call: 7.50
XYZ Sept 41 call: 4.00
To roll up, you would sell your Sept 35 call at 7.50 and buy the Sept 41 call for 4.00, for a credit of 3.50 points, using the prices in this example...