When to take profit or losses
Let your winners run is an often heard statement in the financial world. What if the trades turns. Is it better to take profit, so you won’t end up with a looser? When do you take profit? Is there a method or criteria where you can determine that you have enough? I mean who ever has enough, right?
Let’s say you are using a premium capture strategy, you are selling option strategies like a Butterfly or Iron Condor, expiration is nearing, and your unrealized gains are building. Do you wait until expiration and have the chance to loose everything? Or is it worth the risk to capture the max profit? What is the best moment to take profit? That’s a lotta questions, and I’m not going to beat around the bush and just lay it out on the line.
Your chance of winning after you have achieved 50 percent of maximum profit drops off dramatically; so much that it makes little sense to waste your time even contemplating the possibility. Besides the fact that your capital is tied up for up to 50 percent more time, your chance of the trade is going south increases about 80 percent.
When to take profit
Here’s the guideline to take profit: Sell option premium and if your trade has achieved 25 percent gains, and you are not more than one third the way to expiration, hold on for more. If you haven’t gotten above 25 percent and your half way there, take profit. If you have achieved 50 percent and you are half to three quarters of the way to expiration, get out and take your profit.
It’s all about trading the anti-fragile way. Not only should you be quick to take your profit, but you should be trading small and more often. Know your probabilities of success, distribute the load, and always leave an escape route.
If a defined risk goes against me let it run, except when it is a big width butterfly. If it is an undefined risk trade, and you have still the same assumption for the option, roll the untested side for a credit. This will lower your cost basis but it will extend duration.
Read more on Al on Options
Take profit and managing winners video
When you sell options for premium you don’t wait all the way to expiration. Managing winners refers to take profit in trades before expiration. For example, if we sell a strangle for $1.00, we might look to close the trade at 50 cents if presented the opportunity. This helps increase our number of winners, while holding trades for shorter periods of time. Watch the video about managing winners.
What I have learned of Tasty Trade financial network is to sell option premium and take profits early. If sufficient time remaining e.g. more than 15 days and I can collect between 25-50% of maximum premium I will close the trade and put another one on.