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Exiting a Winning Trade

Mark,

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.

Kyle

***


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].

Schwab_through_LONGO

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