Before initiating any trades, you need to determine your personal risk tolerance (maximum loss you are willing to endure) and then set a 'sell-stop' accordingly. When we indicate a price level as potential support for a bullish pick, it is not intended to be used as a specific exit point once penetrated, but a warning that the trade may be about to turn against you.  

 

Our upside price targets and resistance levels work pretty much the same way, in that they are projections. These figures are not set in stone and should not be relied upon as specific exit points either.

 

Sometimes a stock price will blow right through our price target and continue soaring, as Advanced Micro Devices (AMD) demonstrated in October 2004, as it surmounted our $14.12 price target and surged for another six weeks, before finally peaking at nearly twice our upside price target in early December. On other occasions, a stock will peak just shy of our price target, as Integrated Device Technology (IDTI) did in November 2004.

 

Our recommendation is to closely monitor your positions and adjust your 'stops' accordingly as the underlying security moves. If you are concerned about possibly being stopped out of your position during a brief countermove, then another alternative is to protect against a loss by hedging. For example, you can buy a put expiring the same month as a call you already own. Or if you own a call option you can short another call option for the same expiration month (enter a spread) to lower your overall cost basis.



American-style options may be exercised at anytime (unlike its European counterpart which can only be exercised one day each month. If you short an option, also know as 'sell to open', please be sure you are prepared and willing to endure the risk related to being partially of fully assigned on the short position prior to expiration.