When preparing the plays is there some reason you do not provide an estimated profit goal for the buy, i.e., we expect the stock to gain between $1.50-3.50?
When we play breakouts we try not to put profit goals on the play. Primarily because breakouts tend to run significantly after doing so. If we set an arbitrary number we might miss out on a good chunk of the gain. In a healthy market we will ride through some pullback on low volume to keep a good position. In this market we will bail out if we see price/volume action reverse on us (more volume on the pullback) or if there is bad news out in the market in general that appears to be impacting our positions. We did this on some drug plays awhile back (AZA, GENZ); we had good gains on the breaks higher, but then the market became unsettled. The drug stocks were performing well, but we decided to take profits on our options. Turned out to be a good move for the options as the stocks had a temporary selloff on a weaker market. In this market we prefer to take profits with option plays when the move slows down.
Some plays such as bounce plays or pre-splits we will set some goals if there is resistance at a level above where we bought in or just by the nature of the play. Bounces and pre-splits jump up for a few days and then lose momentum. When that happens we get out. The goal on these plays is to take part in the move as long as it shows real movement. When it slows or starts to pullback, we are out. If a stock starts to stall at a resistance point (moving average, trendline), we get out. There is too much downside risk in this market as stocks can breakout and then fail. Take the gain when it loses momentum.
Now in some sectors that are rising, we are not in as much of a hurry, especially with our stock positions. The drug stocks, beverage stocks and some others are acting ‘right’, i.e., moving up on higher volume, and then pulling back to the 10 or 18 day moving averages on lower volume for the next bounce. These we can let pullback to those levels as long as the selling occurs on lighter volume.
Downside plays are the opposite. The trend in techs is down, subject to violent moves up. We tend to ride them as long as we see good movement down, but we again get edgy around support levels. We have seen the Nasdaq run 5% in one session. That can turn a good put play on its head. To be safe, we employ the same rules, selling the put or buying back the call when it looks as if the stock might try a move up or it hits support and starts to move up.
