When we enter a trade we usually have a profit target in mind (although this differs by strategy) but sometimes we need to roll the trade (usually when the trade is going against us). When we roll, how do we calculate our new profit target?
A table to calculate profit targets on new positions was displayed. The table included the entry credit, profit target and exit point. Calculating a profit target when establishing a position is straightforward and simple.
Things get more complicated when we roll a position because we usually pick up some additional credit. We generally manage positions at a profit equal to 50% of the initial credit after rolling. A table to calculate profit targets on a position that has been rolled was displayed. The table included the initial credit received, the roll credit (we generally collect a credit to roll) and the profit target. We normally roll because we have not reached our profit target, or because we want to protect ourselves against further losses.
Since we sold the position for $1.00, our initial exit point would have been to buy the position back for $0.50 (50% of the initial credit), but we have to adjust our exit price after rolling. Our exit price depends on our overall credit and our profit target in dollar terms.
Tables were displayed showing how to adjust our price target were displayed. Tom and Tony walked us through the calculations and explained how we were targeting the same initial profit in dollar terms even though the percentages have changed.
Watch this segment of “Options Jive” with Tom Sosnoff and Tony Battista for the takeaways and a better understanding of how and why we calculate profit targets after we have rolled a position.
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