What stocks have had a 52-week low?
tastytrade logo
uploaded image

Jul 24, 2018

Smart Trade Management

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

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.

Related Posts

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on 

tastytrade is a trademark/servicemark owned by tastytrade.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”).

tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with tastytrade (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks. tastytrade is the parent company of tastyworks. tastyworks and Marketing Agent are separate entities with their own products and services. tastytrade has different privacy policies than tastyworks.

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

© copyright 2013 – 2022 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.