A unique part of the tastylive philosophy is to manage winners but we also believe in managing losers and this segment explains why a trader should be patient before closing a losing trade. Every premium seller can benefit from this info.
There are several ways we can manage a loser. The obvious way is to simply close a trade but we can also roll the trade to extend duration, roll the untested side and adjust our risk. What we shouldn’t do is be too quick to manage our losing trades. More information is available on the Market Measures segment “Exiting Losing Trades” on December 16, 2014.
Risk is determined at order entry on defined risk trades. When trades go against us this creates a favorable risk/reward scenario. A graph of a defined risk trade was displayed. The graph included the potential risk and potential reward of the trade when the trades go against us.
Things work a bit differently on undefined risk trades. The December 18, 2014 segment of Market Measures, “Premium: Losses before Profits”, tested the percentage of 1 standard deviation strangles that experienced a loss during the trade, and the percentage of trades that came back as winners.
A table of the percentage of trades on a 1 standard deviation (SD) strangle was displayed. The table included the percentages when the strangle ended with a positive P/L at expiration, had a negative P/L at any time before expiration, could have been exited at any time with a 50% of maximum profit, if we had a loss greater than 1x maximum profit before expiration and if we had a loss of 1x maximum profit (before expiration) but later could have exited the trade with at least a 1 penny profit.
When we use an exit strategy time is on our side and it becomes harder for the trade to reach the loss point as time passes. This is because the decay of the option is working in our favor. The probability of touching our short strikes decreases as time passes if the underlying does not move against us:
A table of a short December QQQ $103/$118 strangle from October 23rd to December 23rd was displayed. The table included the date, days to expiration (DTE), probability the our short strikes would be in-the-money (ITM) and the probability that our short strikes would be touched. The table showed that as time went by the probability of a touch decreased (time in your favor).
Watch this segment of “Best Practices” with Tom Sosnoff and Tony Battista for the takeaways and other important information about why we should not take losses too early and how to use the statistics in your favor while keeping to the tastylive mantra of staying small.
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