Great post as always.
I've noticed that in the past, as here, you've
cautioned that milking a trade for the last ten cents is poor risk
management, which makes sense. But that decision seems relatively easy
to make at least in theory, if not in practice.
What about the trade that
is halfway there: say having gained 50% of the total possible profit
for a credit spread? It would seem to me that this is where the real
test of risk management lies and also the most difficult decision to
make in terms of closing or holding because this seems to be where the
most uncertainty occurs. How do you handle that decision?
Here's how I handle this situation.
I do not go through each of these
steps because I have done it enough times. However this is my thought
1) I don't care how much profit has been earned so far on this (or any)
I know that this statement makes some readers believe I am
not telling the truth or that I am an idiot.
2) I look at the position I own right now and pretend I can exit
the trade at this price – paying zero commission.
3) Then I decide: Do I want to re-open this trade – at the same price,
and again for zero commission? Or am I happy to be out of the trade? I
consider the price, the date, the price of the underlying…You get it.
It's a new trade. Do I want it or another trade in its place?
4) It really is that simple. If I want to own it – I continue to hold
and do not exit.
If I am happy to be out, then I enter an order to exit the trade at my
If undecided, I cover a portion. How much to cover depends on
the reason for my indecision. This rarely happens. I find it easy to
decide if I want the position in my portfolio. That comes with
5) Burt – this is why I consider 'do nothing' to be an active trade
decision. Sure, everyone knows buy is an active decision. So is sell
or adjust. But doing nothing is not an act of boredom or disinterest.
It's an active decision to HOLD.