Tuesday, September 22, 2015

Managing exits

The Monday, Aug. 24, China Panic crash in the markets would have caused me big losses had it happened the previous Friday, Aug. 21.

The August options had their final trading day on Friday, and those funds were out of harm's way once Monday rolled around. Had the crash occurred on Friday, I would have had significant losses with no way to try to recover.

I had a good day. Could have been worse. I was lucky.

I am changing my exit strategy to mitigate against that sort of the grey-swan move. (I say "grey" rather than "black" because the China situation was hardly something that came out of nowhere.)


My primary goal is to be completely out of an options series a week before it expires. The exception will be zombie positions, where the premium is so low that there is simply no market for them. This happens a lot when I've sold the losing side of an iron condor, leaving a deep out-of-the-money vertical spread with no value to speak of.

For winners: 

My goal is to exit when the yield is at half my maximum profit or better. This is calculated for a credit position, like an ion condor or a bear call spread or bull put spread, by dividing the current debit required to exit by the credit received upon entry. If I got $1.50 when I sold the iron condor, and if I can exit now for 75 cents, then I'm receiving half my profit by getting out now.

For losers:

As it is now, I'll guide my exit by the trend on the chart, within the limits imposed by the need to be out a week before expiration.

This runs contrary to the "let your winners run" school of trading. It may have been good advice back in the days of when a ticker tape clattered in the corner of a each broker's office. But in these of flash crashes and high-frequency trading? Perhaps not so much.

It has the advantage of increasing the velocity of my trading funds. During earnings season I'm continually at the edge of being fully invested, and I have in prior seasons had to pass up trades because I lacked funds. The early exits of this strategy will make it more likely that I'll have trading funds always available.

-- Tim Bovee, Portland, Oregon, Sept. 22, 2015


My volatility trading rules can be read here.


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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