letting your losers run and limiting winners

[kevagonia]

Guys, I know this has been addressed here in some form and I see it addressed online with regard to day trading, etc.

I'd like to know the opinion of anyone willing to share: context: risk defined small portfolio.

I have a portfolio that is currently limited to small positions that are 1-5% of account size and all defined-risk positions, iron condors and vertical spreads.

I have been instructed to cut all my winners at 50% (iron condors) and so forth and leave my losers alone and let them run their course.

I get the losers, but why not nurse my winners into a higher POP%? I can check my portfolio daily and allow winners to run a bit longer and net some more profit which will make the losers easier to cope with. If something is dead-center at expiration, why not net 100% of the credit I worked to get?

-K

 

[tommcginnis]

Philosophically, the idea is that, if you're selling options, you're *mostly* selling for time decay. (Idea being: of time, and market movement, and volatility, the only thing you have *guaranteed* is the burn of time.) With that, imagine that each sale of an option/spread is the roll of a die -- it bounces up and down, it's about to land on one corner, but it's *mostly* going to land Theta-side up, but there might yet be enough inertia in the kinetics of the cube, to allow a half-bounce to Delta-side up.... "Yipes!"

When it lands Theta-side up, you get 'paid' (by dint of losing outstanding option value), but if it lands Delta-side up, you 'lose' (because the outstanding options increase in value).

The idea of early-exit is in the idea that, as the die/dice are rolling across the table, you have the opportunity to reach out and freeze time "Poof!" like something out of The Matrix -- AND you get to *choose* when you freeze it: You freeze it when it's plainly in your favor, rather than waiting only to watch some slowed-by-horror tip-over of the die to the face that says, "Delta!!" and your 10¢ option/spreads goes to $1.00.

The idea is, 'if you can freeze the roll,' then grab what you can, and go on to roll again.

 

[tomorton]

I don't know if running winners makes any sense in the day-trading time-frame.

That might be because I don't go anywhere near day-trading.

 

[kmiklas]

Jesse Livermore in "Reminiscenses of a Stock Operator" recommended dumping the losers and let winners run.

 

[kevagonia]

I don't know if running winners makes any sense in the day-trading time-frame.

That might be because I don't go anywhere near day-trading.

I think in day trading it would be the example of using a trailing stop, let those winners run! I am asking specific to options and I don't day trade. I am stressed enough....

-K

 

[kevagonia]

Philosophically, the idea is that, if you're selling options, you're *mostly* selling for time decay. (Idea being: of time, and market movement, and volatility, the only thing you have *guaranteed* is the burn of time.) With that, imagine that each sale of an option/spread is the roll of a die -- it bounces up and down, it's about to land on one corner, but it's *mostly* going to land Theta-side up, but there might yet be enough inertia in the kinetics of the cube, to allow a half-bounce to Delta-side up.... "Yipes!"

When it lands Theta-side up, you get 'paid' (by dint of losing outstanding option value), but if it lands Delta-side up, you 'lose' (because the outstanding options increase in value).

The idea of early-exit is in the idea that, as the die/dice are rolling across the table, you have the opportunity to reach out and freeze time "Poof!" like something out of The Matrix -- AND you get to *choose* when you freeze it: You freeze it when it's plainly in your favor, rather than waiting only to watch some slowed-by-horror tip-over of the die to the face that says, "Delta!!" and your 10¢ option/spreads goes to $1.00.

The idea is, 'if you can freeze the roll,' then grab what you can, and go on to roll again.

I'd like to go for a bike ride and sprint in the hills for five minutes. I'd look good and people would think I am strong. (theta) Once I get to an hour I start to look like a microwaved meal left in for two days... (delta)



K

 

[ktm]

It's a mathematical construct. If you think of the index average as largely brownian - in that it's movement is generally random in terms of direction for any given time frame - yet your theta decay rate is known and quite predictable.

If you have half your max profit, then as Tom wrote you "freeze your dice". The further away you are in terms of time, the less likely you are to be in the exact spot where you began. Or the exact spot where you wish to be. It's the inverse of the loss. If you have only a few pennies of your intended profit, booking those remaining shreds is mathematically inferior to leaving it and hoping the brownian motion brings it back into the profit zone. Essentially, taking the profit is the same as leaving the loss for exactly the same reasons.

 

[ajacobson]

Do it as a covered combination with stock and options. Buy a pilot position in the stock - say you can handle a 1000 shares. Buy 500 and sell 5 otm puts/calls and if it sells off - the calls take you out on a rally and the puts double you position. The synthetics is to simply sell 10 puts, but the combo let's you precisely pick your next entry exit. If the stock just sits there you book both option premiums. There is also a cool play doing it against short stock if your overall bearish. As it rallies you get shorter - if it sells off the puts take you out of your short.

 

[Scataphagos]

Jesse Livermore in "Reminiscenses of a Stock Operator" recommended dumping the losers and let winners run.

Regardless of a trader's vehicle, this is good practice.

Unfortunately there is great temptation to "hang on to a loser, hoping it comes back"... and to "take profits quickly on winners" so they can't turn into losers.

Neither is conductive to long term success.

There is a trading saying.... "you can't go broke taking a profit". True, but it's also true that "the market will give you every opportunity to turn a potentially large gain into a small one".

 

[schweiz]

you can't go broke taking a profit"

You can go broke by taking a profit. It all depends of the stats of your tradingsystem.
If you have 40% winners, 60% losers, average profit 200$ and average loss 100$, you make money following your system rules.
If you decide not to follow the rules and to take profits each time you make 100$, your total result will be a loss. So taking profits can get you broke.