Our previous studies have shown that by managing winners we can improve our performance when selling premium in undefined risk trades such as a short Strangles. A recap of one such study was displayed. The study was in the SPY using data from 2005 to the present. We sold a 1 Standard Deviation (SD) Strangle every business day using options closest to 45 Days To Expiration (DTE) and compared the results of holding the trade to expiration or managing winners at 50% of max profit when possible. A table of the recap results showed that holding through expiration yields higher average P/L per trade but that managing winners provides greater average P/L per day due to its shorter duration. Many traders mistakenly believe that the greater P/L per trade is more desirable than the greater P/L per day. We ran another study to conclusively see which way is best.
Our new study was also in the SPY using data from 2005 to the present. We sold 1 SD Strangle at the beginning of 2005 (1 contract) closest to 45 DTE. We opened a new position after closing the old one and compared strategies of managing at 50% of max profit if possible or holding until expiration. An 11 year graph showed that managing winners at 50% produced a profit 76% greater than holding to expiration. Tom noted, “This flies in the face of the industry standard of maximizing profits and target price.”
A results table displayed the cumulative performance comparing managing winners to holding to expiration. The table included the number of occurrences, average P/L per trade and the win ratio. The win ratio was better when managing but the P/L per trade was slightly lower. The number of occurrences though was almost double for managing than not managing so the total profit was much more for managing.
For more information on Managing Winners see:
Market Measures from January 26, 2016: “Managing Winners | Exiting Based on Duration”
Market Measures from April 13, 2016: “Take Off Winners, Before They Become Losers”
Market Measures from April 20, 2016: “Manage Winners and Close Early?’
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the results of our study that conclusively proves that managing winners is more profitable than holding through expiration.
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