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Smart Trade Management

Jul 24, 2018

By: Sage Anderson

Two important aspects of successful trading are identifying attractive opportunities and then risk-managing them efficiently after deployment.

In today's post, we are focusing on the latter topic - a systematic approach to managing positions in the portfolio.

Because options have a finite life, traders basically have two choices when it comes to risk-management of any given position. The trade can be left on until it expires, or it can be closed at some point prior to expiration.

If you’re trading a higher number of instances, it can be helpful to institute a systematic approach to managing trades, otherwise it's likely that many will get overlooked (possibly to the detriment of returns).

Here at tastytrade, we've conducted extensive research on trade management and associated targets, and we hope this data has helped you refine your thinking on the subject. Recently, fresh tastytrade research focusing on trade management was presented on two different installments of Market Measures.

We think these two episodes will help you better understand your choices when it comes to trade management, as well as the implications of those choices.

The first episode highlights a comparison of two different trade management philosophies - managing trades based on P/L, and managing trades based on time. At tastytrade, these approaches are often referred to as "managing winners" and "managing early."

At its core, managing winners is all about closing high performing positions while they are ahead. Managing early, on the other hand, relies on the fact that theta decay decelerates as expiration gets closer, meaning that traders may prefer to close trades as potential rewards decrease, and potential risks increase.

A couple well-known approaches to managing winners at tastytrade include closing strangles at 50% of the credit received, and closing straddles at 25% of the credit received. In the former case, this would mean that if you sold a strangle for $2.00, the strategy would call for closing the position once the market value of the strangle had decayed down to $1.00.

In terms of managing early, the goal is to systematically remove positions from the portfolio before expiration, when much of the time premium (i.e. extrinsic value) has already decayed out of the option’s value. Utilizing this approach, a trader might decide to close positions "after a certain number of trading days has elapsed" or "with a certain number of days left until expiration."

On this particular segment of market measures, the “managing early” approach utilizes “days left until expiration.”

Now that you know more about “managing winners” and “managing early,” we can move on to the meat of the episode, which provides a valuable comparison of the two different styles of trade management.

In order to properly evaluate the differences between the two strategies, a study was conducted by tastytrade which evaluated the historical performance of “managing winners” and “managing early” on a simple short premium approach (short strangle). A third approach, holding through expiration, was also added to the analysis.

The study included the following parameters:

  • Utilized historical trading data in SPY (2005-2017)

  • Backtested short strangles with 45 days-to-expiration

  • Compared the historical performance of three trade management approaches:

    • Holding to expiration

    • Managing winners (at 50% of credit received)

    • Managing early (at various points of the expiration cycle)

The results from this study are shown below:

As you can see in the exhibit above, there were certain advantages and disadvantages to each approach. Notably, managing winners produced the highest win rate, which is, of course, attractive to any trading approach.

However, the “managing early” approach maintained a high overall win rate, while reducing the largest loss, as compared to the other two approaches. We can also see that “holding through expiration” produced the highest average P/L, but one has to remember that strategy comes with other drawbacks.

By managing winners, or managing early, a trader can consequently redeploy capital into new positions at a faster rate, and therefore increase the overall number of occurrences in the portfolio, which should theoretically help reduce volatility in P/L.

On the show, the hosts take this analysis to the second level, and reveal some additional key findings.

What the data showed was that in bullish markets managing winners seemed to outperform, but in choppy markets, managing early had the edge. This is very important data that may help you tweak your approach to suit market conditions and/or your own unique risk profile. More data on these findings is available through this link.

If you are a practitioner of “managing early,” or considering adopting this approach, then the data on this episode should also be helpful - “Managing Winners by Managing Earlier.

Should you have any outstanding questions about trade management, don’t hesitate to leave a message in the space below, or send us an email at support@tastytrade.com.

We look forward to hearing from you!


Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.


Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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