KNOWING WHEN TO SELL

I want to weigh in on Molly's trade and her current predicament. If you follow these blogs, you know she still is in the November $122 call options. She bought them for $1.03. She got 10 contracts so that's $1,030. The market went up and she was profitable. She could have sold them for $1.380, netting $350.

But she didn't get out and held on. Then the market tanked and she was underwater. Bravely she jumped in when it was down, and even though I put in some suggestions later, she had already purchased the Nov $120s. That was a bold move. It was a brilliant move. Here's why. Often, when we have a trade that is not working, we get reluctant to do another trade. We let what happened yesterday determine what we do or do not do today. But that was Yesterday and Yesterday's gone. Really, think of all the times I've mentioned: "It's just inventory." So way to go Molly. Then the next day she got out of this $120 strike price with a preset order for $2.25. She had purchased 5 contracts for $1.25. Her profit is $1 X 500, or $500.

Granted, she was still underwater on the $122s. But they came back also. On Friday they were as high as $1.25. Not much, but definitely better than a loss or breakeven. My thoughts were to sell the option and not let 2 to 3 days go away over the weekend. But she did not get out. So it's on to next week. Let's hope there is no bad news this weekend. And remember it's November and that's usually a good month. However, expiration is this coming Friday.

NOW---WHAT TO DO?
The lesson I stated above is very important---consider the trade each day. Is the storyline still strong? What's happening elsewhere? Et Cetera. But there is another lesson to learn. It's about asking the right question. I love great questions---questions that evoke a great answer or solution.

"Should I buy this rental house, or this stock?" That's okay, but a better question would be: "What else could I be doing with my time and money.?" With this $122 call option, currently at near a breakeven point, what should she do? Should she sell?

That is one of the most frequent questions I get at my seminars: "How do I know when to sell?" Here is a better question: "Would I buy the stock here?" This question forces you to think about the stocks' storyline. Has it run its course? Can this price be sustained? And other ponderings. There is no easy answer, especially with options, where you have an expiration date now five days away. So, even though I would have sold on Friday, it's not Friday anymore. So I ask the question now on the weekend: Would I sell this option now?

To help this thought process, I wonder this: If I wanted to play this option once more before Friday's expiration (and I'm not saying that I do), what would I play---which option? And guess what, I come up with the $122s. Funny? I think so. It is the strike price nearest the money. So, the answer is, what? If I were to buy right now, I'd want to buy the very one that I'm thinking of selling. So, Molly, all I have to offer is in the next paragraph.

On Monday morning, before the market opens, I would look at the Futures. If they show the the Dow is going to be up, then I'd stay in for a bit---trying to sell them for $1.50 to $1.80. There would have to be a 100 point move in the Dow to get this higher price. If the market (Futures) show up only minimally or down, I'd get out soon, especially if there has been other bad news. Then I'd start thinking of the December's. All of this is on the horns of a dilemma, and I hope it's the horns of a bullish dilemma.

Look at the chart above. Notice the big sell-off the first part of August (2011). Now look at the rolling pattern for the next several weeks. Then about 3 to 4 weeks ago it took off again. We had a good October. We then had a few ugly days, but it's rolling again. I think the support and resistance is 11,600 (or 11,800) on the current downside and $12,400 (which it hasn't gotten to yet) on the upside. It should move up in December, after a first part of December sell-off. It should allow a lot of plays.
As you can see, the whole market is in a rolling pattern. Everytime the market changes a lot, like the downturn in August, or the upturn in October, go back to paper-trades, or practice trades. I've been looking at these charts for years, and until something happens, like the repeal of Reg FD as part of the Sarbane-Oxley Act, I do not see much chance for the market to get out of this range. Read my last several blogs for the support and resistance levels.

WHILE IT'S ROLLING---LET'S PLAY IT FOR ALL IT'S WORTH.