Let Your Profit Targets Do the Work

On Friday's holiday-shortened trading session, you'd be forgiven for not sitting in front of your screens during market hours. Half-days are common days for traders to step away. There's usually muted volume and little news flow to make anything worth chasing.

But good things can still happen on half-days—like winning trades hitting their profit targets.

And this is where having working good-till-canceled limit orders at your profit levels pays off. You can take your profits without having to do anything.

Let me give you a perfect example from this past Friday.

In All Star Options, I'd recently put on a bull put spread in Microsoft $MSFT options. This is a credit spread where I shorted the January 465 puts and purchased the 455 puts to define my risk. I collected $3.20 for the trade when I initiated it on November 21st.

As is my best practice, after entering a short premium trade like this, I immediately enter a GTC limit order to cover the trade for half of what I collected. So when I collected $3.20 for this spread, I immediately put out my GTC limit order to close the spread for a $1.60 debit.

And I'm glad I did.

While I was away from my desk running around town doing errands for my family, I got a mobile alert on my phone that my $MSFT trade had closed at my profit target. Nice:

Had I not had that order working, I'd still be in the trade today—because $MSFT is down today. The cost to cover the spread is higher than the price I paid on Friday. Maybe I'd still have a good opportunity to exit at my profit target over the coming days, but what if I don't?

This is why it pays to keep GTC limit orders working at your profit targets.

It's less work for you to monitor. You'll likely remove risk from your portfolio quicker and at more advantageous prices. And you won't miss opportunities when you're not watching.

Think about how many times you've been away from your desk and thought, "I wonder if I should check my positions." With GTC orders working, you don't have to wonder. The market will find your price if it's there to be had.

This is especially valuable for short premium strategies where you're collecting credit upfront and looking to buy back the position for less. These trades can move in your favor quickly during quiet sessions or overnight gaps. If you're not there to take advantage, the opportunity might disappear.

I treat GTC profit target orders like set-it-and-forget-it automation. Once the trade is on and the order is working, I can go live my life. The market will do the work of closing the position when my target is hit.

Sure, there are times when the market gaps past your limit and you could have gotten more. That's fine. I'm not trying to squeeze every last penny out of every trade. I'm trying to systematically remove risk at predetermined profit levels without having to babysit every position.

Half the battle in trading is knowing when to take profits. The other half is actually being there to take them. GTC limit orders solve that second problem completely.

Set your targets. Enter your orders. Let the market do the rest.

You'll be amazed how many profits you collect while you're doing literally anything else.

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Sean McLaughlin | Chief Options Strategist, All Star Charts