When do you have a winning trade? Is there a method or criteria where you determine that you have enough? I mean who ever has enough, right?
Let’s say you are using a premium capture strategy like a butterfly or condor, expiration is nearing, and your unrealized gains are building. Do you wait until expiration and chance losing everything, or is it worth the risk to capture the max profit? Is there an optimal amount of profit to take, where your odds of winning and return on capital are optimized?
That’s a lotta questions, and I’m not going to beat around the bush and just lay it out on the line.
Your chance of winning after you have achieved 50 percent of max profit drops off dramatically; so much so that it makes little sense to waste your time even contemplating the possibility. Besides the fact that your capital is tied up for up to 50 percent more time, your chance of the trade going south increases about 80 percent.
Here’s the guideline: if your trade has achieved 25 percent gains, and you are not more than one third the way to expiration, hold on for more. If you haven’t gotten above 25 percent and your half way there, get out. If you have achieved 50 percent and your half to three quarters of the way to expiration, get out.
It’s all about trading the anti-fragile way. Not only should you be quick to take your profits, but you should be trading small and more often. Know your probabilities of success, distribute the load, and always leave an escape route.