Some Breakout Multiplier members will completely close trades at a max return of 10x. I’m okay with that. But, I wouldn't go any lower because you need the outliers.
I know other members who prefer to hold on to their winners until expiration (after selling the double, of course).
There will be times when the former will work better. And there will be times when the latter strategy is the right move.
But from my experience, there is no correct way to manage these home runs consistently.
I don’t have a hard and fast rule for it.
I will be more aggressive and hold on longer if I think we’re in an extra risk-on tape.
I’ll consider what the broader market and the stock’s peer group are doing.
I’ll look at momentum indicators to gauge how extended the trend is. And I’ll do this with the contract’s time to expiration in mind.
And I’ll assign more weight to the price behavior and level than anything else.
In other words, is the stock clearly undergoing a short squeeze like the one we’ve been riding in SoundHound? I’ll be extra greedy in these instances.
How about resistance levels? Are we running into a big polarity zone where profit-taking is more likely to occur?
That is also the case for SOUN right now:
A few weeks ago on our call, I said I’m targeting those all-time highs as the next stop. Well, here we are.
These are the trades that make our year. They can change our lives if we do this well consistently.
But we have to be disciplined. And I think holding onto SOUN for any more upside from here would just be irresponsible.
When we say the stock could collapse from here, and we won’t lose… It’s true. But when a position becomes this big of a winner… that statement becomes misleading.
Here is a quick example…
We purchased 40 calls at $30 each for an initial cost basis of $1,200.
We sold half at a double for $60 and are left with 20 calls.
From here, we sell ⅕ of the remaining position in tranches.
That would be 4 calls at 5x, another 4 at 10x, then 20, 30, and finally 40x.
If you did this, the 4 remaining calls are currently worth $1,200 each for a position value of $4,800.
Our initial cost was $1,200, so let’s assume that is our targeted position size on every trade.
That means the SOUN position is still worth 4x of our normal position size.
If we are running an account with 10 positions all valued at $1,200, our SOUN calls would be more than 30% of its total value right now.
My point is these positions just get too large… and then, even though you might not lose on the trade, you can give those gains back. We don’t want that.
So today, I completely closed SOUN, and it’s not because I don’t think the stock can’t keep running from here.
Momentum is a helluva drug, particularly for a high short-interest name like SoundHound.
But the risk/reward just isn’t what it was with the stock extended at new all-time highs.
And even a single call can buy me a full new position at these prices.
I would rather take that money off the table and redeploy it into a fresh setup. Something nice and coiled and ready to pop. Just like SOUN was a month ago.
That’s what I’m doing. Anything else would just be too greedy.
These are the kinds of things we’re going to discuss on the mastermind series. We’re going to get into the details and talk about how to make the most of the Breakout Multiplier system. Or at least, how I do.
Make sure you join me for it. Our first one is tomorrow at 1:30
