Managing Winners


Take Profits Often

Managing winners is the core of my trading strategy. I do this for a number of reasons, one of which is gamma risk, or the increased sensitivity of the positions as we approach expiration.

As expiration approaches the theta decay of out of the money options will slow, and gamma risk will increase. Because of this, I will look to exit or roll a trade with sufficient duration remaining.

The following is a study done on the SPX from 2010 – present. They sold a 1st of the Month, 1 SD Strangle with 45 DTE.

Three scenarios were tested

  1. Managed trade at 50% of max profit
  2. Closed with 15 days until expiration
  3. Held until experation

First we take a look at closing the trade at 15 days to expiration compared to managing the winner at 50%:Screen Shot 2015-12-06 at 11.09.29 PM.png

Utilizing these two exit methods minimized the gamma exposure by closing the trade early. Next we compare these two methods to holding through expiration.

Screen Shot 2015-12-06 at 11.11.52 PM

Managing winners at 50% compared to expiration resulted in a 14% better win rate, 60% greater P/L per day, while being in the trade an average of 19 days less. And only giving up a marginal profit overall.

The average time it took to manage a winner was 27 days. Holding the remaining 19 days to expiration made very little sense as the majority of money was made early on, as we can see below.

Screen Shot 2015-12-06 at 11.13.35 PM.png