Zantrio.com Trading Tip | In For Nothing Strategy

A simple strategy for protecting profits is to sell enough shares that will recoup the cost of building the long position. The value of the balance of shares held will be the ultimate profit on the trade. Effectively the trader is marking his position at zero value, offsetting profits to date against the cost of shares bought.

Example:

A trader buys 1000 shares of ABC stock at a price of $10 per share, believing that the company results, due in two days, will be better than the market expects. When these results are announced they are indeed far better than expected, and the shares rise 25% to $12.50. The trader, wanting to protect his profit but remain exposed to the potential for further rises in the share price, decides to recoup the original cost of the trade.

His original position cost $10,000, and so he needs to sell enough shares to realize $10,000. By selling 800 shares ($10,000/$12.50 – the new share price), he is, effectively, left with 200 shares at zero cost. When the trader sells the shares, whatever value he sells for is his final profit.

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