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To manage larger positions. Eventually, you will be able to get into larger positions.
If you start trading, and you’re doing one or two contracts, and you’re getting nervous about your positions, maybe this isn’t the business for you. I’ll be brutally honest with you. If you’re worried about losing a couple bucks, $100-$500, even $1000 – and it can happen in this business. I’m not telling you that you can make money every single month. What we try to do is manage the risk as best as we possibly can. You have to develop the skill set to make the profit itself. In order to make the profits that you want, you have to have these skill sets.
Anyway. I went off on a tangent here. We have open profits now. When Monday comes, we’re going to have four or five days before these positions, our May positions, expire. Common wisdom would tell you that you don’t want to hold these positions into expiration.
Let’s just take a look at our analysis tab for a second, without the QQQs. Here we are on our overall position. If we were right in the center, we would have a profit of $837 on our portfolio. This is our entire portfolio.
However, we are down about here. It is not a bad position to be in. We have an open profit of $788. What risk do we have, going into expiration week? We would like to capture as much profit as possible. We currently have an open profit of $788 for the month, in this demo account. We would like to keep that profit.
Not only would we like to keep that profit, but we would also like to make the maximum profit, if possible. As you can see, when I hover my mouse over our current price on the IWMs – now, this is portfolio beta-weighted against IWM, which is just one of the positions that we have. It shows that we have – if you look down here on May 10 and May 17, May 10 is today. We have $789 in profit. May 17, we have the potential of having $1646 in profit.
When you have 50% of your potential profit, it may be a good idea to take that. I’m not saying that you shouldn’t take it. That’s good profit. We are only doing one or two contracts. If you had 10 contracts or more, you’re talking about $7000-$8000 in profit. However, there is a difference between $789 and $1646. It’s close to $900.
This is a bit of an advanced technique. I don’t expect everyone to do this. In fact, for a lot of you guys and girls, forget it. Don’t even think about it. There is a possibility that it could go in a completely different way than you expected. However, think of it this way: If you are a manager of risk – you are a risk management company. Your business is risk management.
We are not in the center. We are considerably over to the left of this position. We’re not way down here, so we’re not in bad shape. However, let’s take a look at the Dow Jones. On Friday, the Dow Jones Industrial Average dropped 120 points. It broke through the support that was set up over the last 5, 6 trading days, right about there.
That was a key support level there. Remember, I’m not particularly a guy who likes to look at technical analysis. The only thing I am really looking at is support and resistance points. It was support here. It was support here. It rallied up. It came down. It was support here, and here again.
How many times was that? It hit this line 5 times, right here, around this 12794 level. It bounced off it. That shows that, at that time, the market was being supported at that level. All things being equal, it would have held again.
The fact that it hit that line 5 times and then broke through it here, on Friday, indicated that perhaps there was enough urgent selling pressure in the market that brought it below this line of support. It broke through it, and it traded down 120 points.
The big picture here is that you are trying to manage your risk. Because the IWM didn’t go down that much, only 21 cents – but what happens if we get a sell-off? We are holding this into the weekend, and we’re going into expiration week. What happens if we get a sell-off of $500-$600, 500 to 600 points on the Dow? Where is that going to bring us? It will probably bring us down into this level here.
That also potentially limits our potential profit. Right now, remember, we have a profit of $789. If prices move down into here the week before expiration, our maximum profit now – you can see it in the left-hand corner, just follow my mouse – is only $1000. Our actual profit – for the day, we would only have a $300 profit. We would have lost close to $500 profit.
What’s the number after fluctuation? Remember, there are only a couple of rules in the market. One is that prices will fluctuate. The other one, as far as options go, they will expire. What is the third one that I mentioned before? Don’t lose money. That seems obvious, because we don’t want to lose money.
In order for us not to lose money, we need to manage the position that we’re in. How do we do that? It’s very simple. This looks like – let’s say you were watching the weather station, and you lived in the Florida Keys. You saw this hurricane coming. The weatherman is telling you well in advance where the hurricane is going to hit, and when it’s going to hit. What would you do?
Would you just stay there in your house and keep all the windows open, and sit back and relax, and enjoy your favorite beverage in front of a ballgame? Or would you prepare?