Follow-Up Action

What Is a Follow-Up Action?

A follow-up action is any subsequent trading that influences a laid out position in a security or derivative, including hedging and other risk controls. Follow-up actions are taken to change the amount of exposure an investor has in a position, or to limit a strategy's losses or profits.

Understanding Follow-Up Actions

The word reference characterizes a follow-up action and an action or thing that effectively increases the effectiveness of a previous one. When applied to investing and trading, this means adding or changing a position or strategy to update its risk profile or expected returns.

For instance, an investor who is long in shares of Company XYZ might be nervous about future losses. They could make the follow-up move of purchasing a put option for the stock, which would limit losses in the event of a downturn. The opposite may likewise be effective. Involving the now-hedged position in Company XYZ, on the off chance that the stock price rises several points, the put option might be sold to recapture part of the original premium paid. Since the strike price of that put option is presently deep out-of-the-money, meaning it is far below the current price of the stock, it loses its viability as a hedge.

The holder could likewise roll the out-of-the-money option into a at-the-money option, with a strike price at or close to the current price of the stock. It will cost money to carry out, raising the total cost of the hedge, however a follow-up action safeguards the gains made since the purchase of the principal option. With additional complex options strategies, for example, straddles, when the underlying security moves in a single course, the holder might close the option that would profit with a move in the other heading.

Follow-Up Actions as Profit Makers

Follow-up actions need not be hedges, as it were. An exceptionally simple model would add a triumphant position. A stock investor purchases 500 shares in Company XYZ for, say, $35 per share and the stock conventions to $40 per share. This recommends that the investor's projections were right and the stock inclines bullish. By purchasing a second part of 500 shares at $40 per share, the investor can now be more certain that the stock is. Conversely, they might have purchased 1000 shares at $35 per share originally. This would put more money at risk in a stock that has not yet proven itself in the marketplace.

It could be said, a stop-and-converse strategy is likewise a follow-up action. Suppose that the investor bought XYZ at $35 with a $5 stop and the stock falls to the point of triggering that stop. The investor may now accept that the stock isn't bullish as first suspected and, to be sure, is presently bearish. The investor can make the follow-up move of closing the original long position and opening another short position.