Managing Your Profitable Trades: Incredible Statistics!


Starting with option selling might seem challenging and sometimes even intimidating at first, but what if we have a whole arsenal of exit strategies, calculators, technical indicators, market assessment tools and a thought-out plan which help us determine what we should do? I've developed calculators when we want to unwind positions, roll out to the next month at the end of the contract cycle. However, over the past weeks I've had the most success managing winners early at 50% of maximum profit and playing the higher volatility.

In this article, I want to clarify the reasons why you should be utilizing the 50% rule to mitigate risk, increase flexibility and boost your success rate and daily profits. As you all know, option selling is a never-ending process of educating yourself to highest possible levels and creating your own trading system and sticking to it no matter what happens.

Exit Strategies: Our Edge

The first question relates to exit strategies. When do we consider closing out a particular trade? Figuring out when exit strategies really pay is based upon the following cornerstones of options trading when it comes to profit management:

  • Managing winners is critical to option selling success. Looking what stocks to utilize and how we can create an optimal risk/reward is what will determine our rate of success. Managing our trades starts with weighing market outlook, strike prices, technical analysis, market correlation, IV rank et cetera. These judgements don't happen overnight: take your time to figure out what you are going to do with your hard-earned money.

  • If the options we sold have yet returned 60% of their max. profit one week before expiration Friday and it's an at-the-money call/put with the risk of a potentially increasing volatility, close your position. Why shouldn't we chase the other 40%? Because of gamma risk. This phenomenon typically leads to uncertainty among option traders, more fluctuating option prices and can wipe out a lot of our unrealized profits.

  • If you've generated 50% of your maximum profit in one week or two with three or two weeks to go until expiration, close your position.

  • By managing at 50% of maximum profit, we get the same win rate as holding to expiration while generating a noticeably higher profit per day.

  • Time decay deteriorates for OTM puts/calls, whereas ATM puts/calls retain their value the longest. So, short OTM puts or calls can be unwinded much faster than one would think courtesy of constant time value erosion.

Have a look at the following table which depicts the results from my option value calculator based on 31% volatility, a risk-free rate of 1.6%, 30 DTE and a share value of $158.20. Where do you want to be? You definitely don't want to keep your position open heading into the last week before expiration.

When selling OTM puts with a delta of -0.30, you already have collected nearly 50% of your maximum profit halfway. And if you sold options with a high IV Rank, things get even better as we benefit from possible volatility contraction.

Most retail investors wait for the other half the following two weeks, but it doesn't make much sense, not to mention the higher risk of ending up with a losing trade, but the actual win rate and daily P/L of managing early will crush holding to expiration. First of all, both gamma and vega increase and thus the impact of a changing share price, delta and volatility. Consequently, your options can take a tremendous hammering. Be aware of these rapidly changing Greeks! That's why, if our targeted 50% of maximum profit hasn't been reached halfway, we want to close/roll our position 1.5 weeks before expiration in order to avoid the directional exposure of options that are closer to expiration which will obviously be much more sensitive to underlying movements.

Take a look at the following two graphs which point out that in a 45 DTE cycle we make the most money in the first half of the contract period, while the last 1.5 weeks go with particularly more volatile swings in actual daily profits. By managing your trades early (50% of max. profit) or closing at 1.5 weeks before expiration we can essentially avoid excessive risk and circumvent volatility that could result in a deeply disappointing result.

But there's way more. TastyTrade's research team also found that managing at the midpoint of the cycle does provide less big losses during market selloffs, just like last year's December melt-down. Since we buyback the option halfway the contract period, we roll it out to the next cycle, thereby generating a small credit to offset earlier losses while locking in a very high implied volatility which is likely to plummet once markets start to stabilize, making it easier to reach 50% of max. profit (credit received for short puts).

In other words, managing early crushed holding to expiration and smoothed volatility out. Less drawdowns and a better risk/reward profile. Remember that the graph below doesn't distinguish the benefits from selling puts in a high IV rank environment. Also, I'd like to kindly remind you of the fact that the researchers tested short 16 delta puts on the SPY, instead of looking at the best performers at any given point in time and thereby adjusting deltas accordingly.

That's precisely what we at Option Generator aim to do: factoring in everything that determines whether or not we stick to defensive low-beta stocks or have to rotate our portfolio a little bit, paying attention to technical analysis, IV ranks, common sense. All of these actions simply throw the odds even further into our favor and we're extremely proud that we can share our best picks with premium members.

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