Take Profit Rules Explained
In Options Auto Trader, using Take Profit Rules is a crucial part of locking in gains when trading options. We offer two types of take profit rules: Take Profit Percentage and Take Profit Amount. These rules allow you to automatically exit a trade when a specific profit target is met. In this article, we'll explain each type of take profit rule with examples using options selling scenarios.
Take Profit Percentage
A Take Profit Percentage rule allows you to automatically exit a trade when the option reaches a specified percentage of the premium you sold it for. This rule is beneficial for traders who want to secure profits without waiting for the full expiration of the option contract.
Example:
Let's say you sell a cash-secured put and collect a premium of $2.00 per contract. You set a Take Profit Percentage at 50%, which means you aim to keep 50% of the premium before closing the trade.
- Initial Premium Collected: $2.00
- Take Profit Percentage: 50%
- Target Price for Take Profit: $1.00 (a 50% decrease from the initial premium)
Once the option price drops to $1.00, the system will automatically close the trade, allowing you to secure the profit without waiting for the option to expire.
Benefits:
- You lock in gains before expiration.
- It reduces risk by securing profits early, particularly in volatile markets.
- It increases your win rate based on backtests.
Take Profit Amount
A Take Profit Amount rule lets you specify a fixed dollar amount of profit you want to capture before the trade exits. This method is ideal for traders who prefer to set a specific monetary target for each trade.
Example:
Assume you sell a covered call and collect a premium of $1.50 per contract. You set a Take Profit Amount of $75. This means that when your total profit on the trade reaches $75, the system will automatically exit the trade.
- Premium Collected: $150 (since each options contract represents 100 shares, the premium is 1.50 × 100)
- Take Profit Amount: $75
Once your trade has made $75 in profit, the system will close the position, locking in your gains.
Benefits:
- You can define a clear monetary target for each trade.
- It simplifies profit-taking decisions by focusing on a specific dollar value.
Combining Take Profit Rules with Stop Loss Rules
For optimal risk management, you can combine Take Profit Rules with Stop Loss Rules. This ensures that while you’re aiming for profits, you also have protection in place to minimize potential losses if the market moves against you.
- Example Setup: You sell a cash-secured put with a premium of $2.00. You set a 50% Take Profit Percentage and a 50% Stop Loss Percentage. This setup ensures that the system will automatically exit the trade when the price drops to $1.00 for a profit or rises to $3.00 for a loss.
Choosing the Right Take Profit Rule
When deciding which take profit rule to use, consider your trading strategy:
- Take Profit Percentage: Ideal if you prefer to lock in a percentage of the premium, providing a proportional profit to the size of the trade.
- Take Profit Amount: Best for traders who like to target a specific dollar amount, giving you a fixed profit goal.
Conclusion
Setting up Take Profit Rules in Options Auto Trader is a simple yet effective way to lock in gains automatically, whether you prefer using a percentage of the premium or a specific dollar amount. These rules help ensure you stay disciplined in your trading strategy while maximizing profits. If you have any questions about take profit rules, feel free to contact our support team for assistance.