The Unlucky Investor's Guide to Options Trading guides readers through the world of options and teaches the crucial risk management techniques for sustainable investing.
The term “managing winners” refers to closing a trade prior to expiration and prior to max profit.
We tend to close our winners when we reach 50% profit, or lower for certain strategies like calendar spreads, diagonal spreads and iron flies. For these, we look to manage between 10-50%. So why do we manage our winners? There are a few reasons:
Improved Win Percentage
We have found that managing our winning trades prior to expiration can improve our probability of success. If we consistently enter trades with a probability of profit of 70%, but we close them when we reach a certain percentage of profit, we can increase our overall percentage of winning trades higher than 70%. This is because we’re taking risk off the table and we’re also decreasing the time that we’re in the trade.
Risk Vs. Reward
Lower Time In Trade
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