Exiting a Winning Trade


Thanks so much for your site and your book. Both have been invaluable
to me as I've learned IC trading over the past few months.

My question is: Can offer any guidance on when to
close a profitable position. I'm getting familiar with my comfort zone
and when to get out when my shorts are being threatened, but I'm not
quite sure when to exit a position when things are going well.

I tend to
be too quick on the trigger to exit a good position because I want to
lock in my profit.  I think I'm missing the really valuable time
decay from weeks 6 to 3 ('till expiration). (I am not comfortable holding
any closer to expiration than about 3 weeks)

As an example, I have an SPX IC open for Oct 1000/1010 puts 1180/1190
calls. I opened it 8/18 for a credit of 3.20. Both sides are still open
and it's current mid-price is 1.65. So I could close now for a
profit of 1.55 (or a bit less depending on where I can get filled).

However, I'm 72 points (6%) from the short call and nearly 100 points
(10%) from the short put, so I'm still well within my comfort zone. How
long would you let a trade like this ride.



Hey Kyle,

Thanks for the kind words.

We have a different way of looking at things.  In my opinion:

1) It does not matter when you made the trade
2) It does not matter how much you collected when making the trade
3) It does not matter how much profit you have now

Yes, I know that it's easy to disagree.  And you are with the majority who believe profit is the crucial number.  My recommendation is to try to join the minority.  There is no doubt in my mind that paying attention to original position cost will eventually cost you dearly (because it guides you to poor decision making)

What matters is that you own this specific iron condor today, and the price is near $1.65.  Are you comfortable holding this position TODAY at this price?  Does the current risk and potential reward (going forward) still fit within your comfort zone?  Would you consider opening a new trade at this price TODAY?

If your answer to any of these questions is 'yes', sit tight.  Ask yourself the same question every day until the answer is 'no.'  That's the time to exit.  How strongly you feel about that 'no' tells you how aggressive to be when exiting – i.e. how much to bid.

As the months pass, and you do this frequently, you get a good sense of how frequently to ask that question, and at approximately what price (assuming you have the luxury of waiting) you eventually decide to close.  NOTE:  Different market conditions (more or less volatile) will alter your plans.  But when you have a plan, you have a big head start on solving this dilemma.

Also be ready to close just one side when it reaches a certain price before a certain date.  For me that's 15 to 20 cents for the call side or the put side (of a 10-point RUT iron condor).  I'm very eager to pay that with 4 weeks to go, but still willing to pay that 15 cents – even with less than 2 weeks to go.  But, I'm conservative on this point.  People who have not been hurt badly by allowing cheap options to remain open when it costs so little to cover – seldom understand.

When you make the trade, try to make a trade plan that tells you when to exit. Write down how much you hope to earn when things go well.  I understand that right now you don't have enough experience to know that price.  But make a guess.  That guess does not have to be written in stone.  You already have a send of timing as to WHEN you plan to exit.

After a bunch of trades, these trade plans will be easier to create.  And they can be flexible.  But it gets you to thinking about exiting.

This is very important.  I've said it recently, but it bears repeating for all new iron condor traders:

The past several months have given iron condor traders ideal trading conditions.  Unless you sold front month options that were not too far out of the money, iron condor traders have had the luxury of opening positions and exiting when they want to exit. 

The one and only reason that you feel you are 'missing valuable time decay' is because you have not owned an iron condor position when the markets were volatile.  Holding would have been the winning decision in your previous trades. THAT DOES NOT MEAN THAT HOLDING WILL BE THE WINNING DECISION WITH CURRENT OR FUTURE TRADES.

Are you aware that at the most volatile periods during the 2008/2009 debacle, the markets were so volatile that they were averaging a 5% move every other day? How would you feel if SPX moved 50+ points every other day?  Would you feel that holding longer was still easy money?

We both understand that holding offers more time decay and more risk.  We know that exiting early feels wrong when the market just sits there and does nothing.  But, if you plan to open a Nov or Dec position after exiting, your new position will earn a profit when the market does nothing.  It's truly a matter of which position you want to hold and which gives you more comfort.  If you seek maximum profit from every trade, you will make extra money for awhile.  But at some point, you will discover the wisdom of not being greedy. But, that $1.65 still feels too high to pay right now.

Here's a guarantee:  As I noted above, the past several months have been almost perfect for iron condor traders.  However much you are making now – it will not continue.  You will earn less, or even lose money during some months.  i don't know when market conditions will change.

It's your results that make you feel that you are exiting far too early.  When you have seen more active and volatile markets, you will look at this situation differently.  Experience comes with trading.  The fact that you do want to get out at some point prior to expiry tells me that you understand how risk works – at least to some degree.

Back to the problem:  For my comfort, the current price is too much to pay.  I'd want to pay less.  I don't know how much less.  It's a day to day, or week to week decision. One thing that may help you decide:  If a new position looks so temping that you want to own it NOW, that could be a reason for exiting the current trade and opening the new [assuming you cannot hold both at the same time].



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13 Responses to Exiting a Winning Trade

  1. Gordon 09/10/2010 at 8:01 AM #

    Thanks for another thought provoking column. Would you be willing to share the template of your trading plan? What factors you deem important, trigger points, why or if you modify the plan, etc. Nearly everything I read talks about preparing a trading plan, but nobody gives an example or explains how to build one.
    I always start out by sizing my trade, establishing my maximum downside limit and expected profitability, then I look at the greeks, but I’m sure that I’m blind to factors or processes that will help me execute better trades. I mostly trade covered calls, with some spreads and IC’s added from time to time.

  2. Mark Wolfinger 09/10/2010 at 9:00 AM #

    One reason you don’t see a lot of plans is because too few traders use them and they are very personal. Besides, what suits one trader is not likely to suit another.
    My trade plans are different from those of most traders. However, there are many aspects of making a plan that worth discussing. Look for more on Monday, 9/13.

  3. Jorge 09/10/2010 at 9:19 AM #

    Mark, how did you trade those tough months during 2008/2009? Did you trade ICs?

  4. Mark Wolfinger 09/10/2010 at 9:38 AM #

    Yes, I traded iron condors. With insurance.
    I traded a LOT. I traded too much. I traded much bigger size than I do today. And I had to make position changes fairly frequently.
    I did not do badly – amazingly. I lost, but the losses were fairly small considering market volatility.

  5. Steve 09/10/2010 at 3:51 PM #

    Great column again Mark,
    I just want to make sure I understand when you say when you made the trade, at what price and how much profit you have now don’t matter, it is whether or not you think that trade is a good one today. So just pulling numbers for ease of example…
    If you open a position with a max profit potential of $1,200 and your max risk is $300 (through position sizing and money management) you have a potential 4:1 ratio. Now, 15 days later you have realized $900 of that gain but your risk remains at $300. So on day 15 you have a brand new trade with a 1:1 ratio and your decision is now whether or not the trade as it stands today is a good position removing the performance of the previous 14 days.
    Is that an oversimplified explanation of what you are referring to?

  6. Mark Wolfinger 09/10/2010 at 4:24 PM #

    Those are amazing numbers in that your risk has not increased as you earned that $900 – but yes, you understand what I mean.
    Keep in mind that someone who trades 4:1 is not likely to be happy with 1:1 – and that person would almost assuredly exit this trade.
    That is what you own. You own the position as it stands 15 days later. To think “I can take the risk becasue I’ve already earned $900” is a mistake because it’s your $900. You already earned it. Do you like the (new) position today? Do you want to own this, or try to find another 4:1 trade?
    I was thinking more of a situation in which the potential is now $300, but the risk has increased to $1,200.
    This is more difficult. The risk/reward has changed dramatically – but this spread probably has a high probability of making more money.
    Thus, the KEY is different for each trader. Are YOU comfortable with the numbers: the risk, the reward, the odds? To me that determines whether you hold for a bit longer or exit now.
    Good question.

  7. davmp 09/11/2010 at 1:24 AM #

    Hi Mark,
    As always, I very much appreciate your time spent on this blog!
    It isn’t clear to me how the risk has increased given that Steve said “max risk is $300 (through position sizing and money management”. Or perhaps I’m misunderstanding the wording? I thought he was implying stops of some sort on his position, which multiplied by position size, gave a max loss. I don’t see how that would change over time.

  8. Mark Wolfinger 09/11/2010 at 10:46 AM #

    Me neither, but because that’s not the major point of discussion, I just accepted his scenario as ‘given.’

  9. Steve 09/13/2010 at 11:18 AM #

    I was just using random numbers. They were not referring to any type of current position I have. Mark is correct, it wasn’t a huge point. I was merely trying to just put numbers to what I have heard Mark say over and over again for my own understanding.
    Thanks for the clarification Mark! I do appreciate it. I wish I could find more of those trades that risk stays constant as rewards increase… 🙂

  10. Mark Wolfinger 09/13/2010 at 11:25 AM #

    I have a favor to ask: When you are using a fictional example, please say so. Thanks

  11. Steve 09/13/2010 at 1:25 PM #

    Ok. No problem. I thought I had stated I was just pulling numbers for ease of an example but I will make it more clear they are fictional numbers next time. Thanks!

  12. Siva 09/16/2010 at 4:27 PM #

    Hi Mark,
    Long time reader of your blog, read your book “The Rookie’s Guide to Options ” . Firstly thank you very much for all the free information sharing. I am into this options (premium selling) business for last one year, so far just educating myself. Practicing with small money on different strategies.
    Question on high frequency trading: What do you think of frequency trading and the retail trader competing with those systems. Down the line what do you think of the option selling business, do the risk managements and trading style going to change drastically and do the retail people got any room to play with all these advancements and changes in the technologies with respect to trading.

  13. Mark Wolfinger 09/16/2010 at 5:20 PM #

    You are very welcome and I’m pleased at your appreciation of my efforts.
    1) I loathe HFT and believe it ought to be against the law.
    The retail trader does get the short end of the deal, but that has always been the case. Wall Street is not looking to protect anyone except themselves.
    I don’t believe HFT affects option prices because the price changes of the stocks are very small.
    2) I don’t see big changes because there are always going to be those who buy options and use them as portfolio hedges.
    However, if it is eventually decided that sellers truly have the edge over buyers, what will change is that there will be more sellers.
    I don’t think it’s a big deal because any reasonable decline in option prices (due to those sellers being in the market) will be met by an increased demand for options by hedgers.
    Raging bull markets and market crashes will not disappear, so the options buyers will remain.
    3) Retail players get to use any technology they can afford or which is offered to them by their brokers. Thus, I see them as always being behind the times.
    Siva, any edge you can get is to your advantage. Yet, for premium sellers, the biggest problem is the size of potential losses. Thus to me, owning insurance or exercising careful risk management is the best you can do to counter any edge that others may have.
    It feels naive, but I am happy being able to do what I do, even knowing that people with more sophisticated techniques and tools can do better than I.