Manage Trades Early how will it benefit you
Stock option prices are moving a lot. One day they are going up and the next day they can go down. As soon as you can make a decent profit in a trade take it from the table. You won’t like it when you wait too long and see the trade turn into a looser. That is why we manage trades early. Would you really benefit from it?
The term “managing winners” refers to closing a trade prior to expiration and prior to max profit. We tend to close our winners when we reach 50% profit, or lower for certain strategies like calendar spreads, diagonal spreads and iron flies. For these, we look to manage between 10-50%. So why do we manage our winners? There are a few reasons:
Improved Win Percentage
We have found that managing winning trades prior to expiration can improve our probability of success. If we consistently enter trades with a probability of profit of 70%, but we close them when we reach a certain percentage of profit, we can increase our overall percentage of winning trades higher than 70%. This is because we’re taking risk off the table and we’re also decreasing the time that we’re in the trade.
Risk Vs. Reward
Lower Time In Trade
The main benefit of having a lower time in the trade is the fact that we can redeploy capital elsewhere in a new trade, and likely collect more. In the same example above, instead of waiting until expiration to hopefully make that extra $0.50, we could probably take the trade off and look for a different underlying to trade to collect even more than that. This aspect of managing winners can help improve P/L per day over the long run.
There are not many downsides to managing winners early. One thing to keep in mind, however, is commission costs. We always want to ensure we’re covering commissions and not managing too early. We wouldn’t close a trade for a $0.10 winner, as that would likely inhibit our ability to profit after commissions.
Selling Options is an excellent way to receive option premium. We enter positions wit a certain probability of profit and around 45 days to expiration. Not with the idea to let them expire but to take profits as soon as we can make 25% of the maximum profit. By doing so we increase the number of winners. Because you manage your trade early you can redeploy your capital in another trade.