A trade example for taking profits. (September 9, 2010)

  We have a few main rules in our trading and investing. First, take what the market gives; don't try to make things happen that are not there, don't try to fight the market. If it is giving you upside, take it. Second, follow the leaders. Figure out where the money is going (the market tells you) and then go with it. This is a corollary to rule number one, but people still don't make that connection even if they get number one. Third, take some partial profits at logical places, but let your winners run. If you follow the first two rules then this third one should take care of itself . . . IF you let it.

FFIV is a classic example. It has been a clear market leader since the 2009 low and was a leader even before the 2008 meltdown. Thus we continually look for opportunities to play FFIV AS we let current plays run.

To see how this applies we have to go back into some history. Back in the summer we were looking for opportunities to play FFIV, as usual, and we were watching an ascending triangle form from late April into June. Note that most stocks PEAKED in April and sold off, but FFIV held its gains and worked on a new base without giving up the goods. On June 5 FFIV sold to the 50 day EMA and held; we always watch that in patterns as a higher low at that level can lead to a breakout. So we put FFIV on the report to wait for the buy signal.

It wasn't quite ready and went back to test the lower trendline, but it bounced off that level sharply two straight days, testing it intraday and snapping back. That showed lots of buyers picking it up when it tested. On 6-11 FFIV broke upside off that test and that was our trigger to get in given all the positive action it was showing. We bought some stock at $69.57 and some October $70 strike call options for $7.55.

Good timing as over the next six sessions FFIV rallied to a high of $77, clearing the triangle. It couldn't hold that move and sold into early July, but held the trendline yet again. That vaulted FFIV higher, triggering the real move. It rallied through 7-14, hitting our initial target on an intraday surge. We banked 1/3 of some 13% stock and 64% option gain given FFIV had rallied for 7 straight sessions. Then we sat back to let the play work for us.

Well, we didn't totally sit back. As is often the case, after the strong breakout FFIV came back to test the breakout, closing right on top of the upper trendline on 7-21. We readied for a new buy point on this nice test. Never got the chance this time. FFIV exploded higher the next session, gapping 7 points and gaining over 10 on the session. The run was on, and from here on we let FFIV pile up the gains for us. We saw the upside market bias, we picked a leader that was in position, we took some initial gain to pay for the play and get over the feeling we had to take profits, and now we were going to let it run.

It ran through early August, sold back in a quick market correction, then rallied to new highs through last Thursday. That last run was a good one, but the action was getting choppy. A strong move Wednesday on strong volume. Then a gap higher Thursday and a continued race higher, but then it reversed after hitting $98 on the high. When we saw the overall market action as well, the SP500's proximity to the top of its trading range, and key stocks reversing on volume, we decided to pull the trigger and bank some more gain. We sold another 1/3 of our stock for $97, banking 39+%. We sold another 1/3 of our options for $26.80, banking a cool 255% gain.

FFIV finished the week with a modest test. It still likely has upside but with this kind of run under its belt and October options, we wanted to bank some huge gain, particularly when the market started to show some issues. At this point we will simply let the market take us out on the rest of our positions, i.e. just keep a good stop point and if the market and FFIV sells, then we lock in a big gain. If it continues to rally, the gains continue to pile up. The October options are the one area we may have to take proactive action if the market continues higher: at some point we need to lock in the final gain before expiration, but that is a good problem to have.


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