We believe in the mechanical selling of options, but since this carries a significant amount of risk, we need to know how to determine exit points for our losing trades.
Our studies have convinced us to manage winners at 50% of max profit, and other studies point to managing losses when the loss is equal to 2x the initial credit. With this management style, 80% of our trades must be winners if our average win is 50% of the credit received, and our average loss is 2x the initial credit received.
What happens if winners are managed at different percentages of max profit? How does this change our required win rate to break even? Can losers still be managed at 2x the initial credit, or does that have to change as well?
The relationship is simple: the sooner we plan on taking profits, the sooner we need to take losses in order to keep our required win rates "realistic." For example, if we manage winners at 50% of max profit and manage losers when the loss is equal to 2x the initial credit received, we need an 80% win rate to break even. If we instead manage winners at 25% while still managing losers when the loss equals 2x the credit received, our win rate needed to break even jumps to 89%.
Watch this segment of “Options Jive” with Tom Sosnoff and Tony Battista for the valuable takeaways and a better understanding of the risk/reward relationship when determining trade management strategies.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.