Key to success is Managing Winners
While selling options for premium will help you improve your probabilities of profit, managing winners will be equally important.
Trading once a month is not enough to let the probabilities work for you, you need to trade often. You will setup the trade in a consistent manner and takeing aproximitedly the same risk in every trade.
Have you ever heard of the expression “Key to success is managing winners”. When your trade is making profit what do you do? You often read “Sell your losers and let your winners run”. This endlessly quoted Wall Street adage. Is this the way to be and stay successful? Or should you close winning positions, and what point do you close them?
The markets will give you several opportunities, and the markets are very competitive. The price of an underlying very rarely takes off in one direction and just keeps on going. There is a lot of competition.
Should you let your winners run?
In the blink of an eye the market may turn and your profit diminishes. So the key to making money in trading is to bank, bank, bank profits while the options are in profit. You have to Manage winners while you still can do it.
There might be a difference in trading if you buy and sell stocks or when you are using options though. I think to sell options to receive option premium is the best way. And from this perspective we look on how to manage winners successfully.
There is an old adage saying “let your profits run”. Is this a valid statement? Many books say If you want to create wealth you need to let your winners run and you have to cut your losers. Unfortunately this statement is not what we experience in everyday life of an option trader. A few questions that can challenge this adage; what qualifies as a winner or loser? How long should one hold the winner, a few days, a few months or until expiration? What happens if instead of cutting losers, let the losers run and give it the time to turn around. Are today’s winners tomorrow’s losers or vice versa? Is buying winners about running after growth? And selling losers about risk management or spurning value? We know how it sounds if we would have inverted the adage and said “running losers, cutting winners”.
You have sold options and received option premium as a credit. After some time the option experience theta decay or the stock is moving in your favour. What action do you take when a position becomes profitable? Do you want to manage your winners directly or do you want to wait a little bit and make more profit. What are you looking at before you take action? We are looking at:
- underlying assumptions
- market conditions
- your portfolio
- trade strategy
How to Manage Winners video
I came across a financial channel which is seen on TastyTrade.com. They did an amazing study about how to manage winners. What they show is never been seen before. And all their conclusions are based on research and not from what people say or what is written in theory books. Watch the video and learn when to manage and close a trade.
Take away from to manage winners
You have sold options to receive option premium. You want to benefit from theta decay or hopes the stock moves in a favourable direction. We have seen that when you take manage winners you lock in profits. Some of the factors to consider when deciding to manage winners are: How much profit is there left in the remaining trading days, Is there something changed in the market conditions, how is our overall portfolio doing?
They conduct a study where they sold a 1SD strangle with 45 days to expiration with different underlying. They closed winning trades at 25%, 50% and 75% of maximum profit.
In general you take profits at 50%. We see that our probability of success decreases as we wait to reach a higher percentage of profit. The average P/L per day at 50% of max gain is 85% greater than holding until expiration!
In any case they tested it is better to close the trade before expiration!
I trust that you have learned a lot of new things today. That to sell option premium and managing winners is your key to success. Continue to read more on next posts. when to take profits.