Strategy thinking
When to close a winner
The hardest decision in options is closing a trade that is going your way. Here is the rule I use.
I lost more money holding winners too long than I ever lost on outright wrong trades. Every options trader I respect has a version of this story. Sam taught me the rule that fixed it. Close credit trades at 50% of max profit. Stop debating with yourself. Just close.
Why 50%
A credit trade collects the bulk of its profit in the first half of its life. By the time you have captured 50% of max profit, you have usually consumed 30 to 40% of the trade's duration. The remaining profit takes longer, ties up capital longer, and exposes you to that compounds as expiration approaches.
The trade does not owe you the last fifty cents. Take the deal that already paid you eighty.
The math, plainly
- You collected $100 of credit. Trade is now worth $50 to close. You have made $50.
- That $50 took, say, 12 days. The remaining $50 will take another 30 days.
- The first $50 paid $4.16 per day. The next $50 will pay $1.66 per day.
- Same risk per day. Different reward per day. Worse trade.
The exception
If the trade is a broken-wing butterfly with the credit covering the lower wing, you can hold longer because the downside is free. The upside max profit is hit at a specific spot price, and waiting for that pin is acceptable as long as you respect the 21 DTE rule.
What to do next
Set a calendar reminder for 21 days after every trade you open. Set a price alert on your broker at 50% of max profit. Make the decision in advance so you do not have to make it under pressure.