optimal point for profit taking

[Baozi]

hello all,

So.. I am often playing with pseudo-fly structures which have the maximum payoff at a certain strike and lose at the wings. I usually have a defined profit target at 25% of the maximum payoff, which seems a reasonable rule of thumb.

It happened however many times that the structure immediately gained 15%~20%, then went back almost to zero, then after one month finally reached the target. Clearly, in hindsight, had I taken immediately 15% that would have been a much better allocation of my capital.

So at this point I'm wondering: anyone here came up with some useful heuristic that links elapsed time and profit target? Care to share?

 

[Peter8519]

During volatile period, a faster hand based on percentage before it disappear is a good choice. During trending market, TA trend following is the best. If range bound, TA support and resistance. The is no optimal. When there is money on the table, take it. In my trading, I never get 10 baggers. So, this advice of mine may not be good enough.

 

[Baozi]

During volatile period, a faster hand based on percentage before it disappear is a good choice. During trending market, TA trend following is the best. If range bound, TA support and resistance. The is no optimal. When there is money on the table, take it. In my trading, I never get 10 baggers. So, this advice of mine may not be good enough.

thanks, not bad advice, but can you be more specific? I'm trying to come up with a set of clear rules beyond the simple "gut feeling"..

 

[Peter8519]

Stan Weinstein's 4 stages is good guide.

Brief description of each stage.
https://www.investopedia.com/articles/investing/070715/trading-stage-analysis.asp

In the real world, it's not so straight forward. There are frequent false moves.

Here is an example. This is Hong Kong stock.

In order to avoid these kind of traps, let it form a longer base.

 

[Scataphagos]

thanks, not bad advice, but can you be more specific? I'm trying to come up with a set of clear rules beyond the simple "gut feeling"..

If you understand "support and resistance" (that's "Price TA", you know)... there are 2 most logical places to take profit. #1, is aggressively sell into what you presume to be exhaustion/resistance of your underlying, and #2, the issue has broken back against you enough so that it looks like the up-move is done.... that's a defensive sell.

 

[Baozi]

ok wait one sec.. this is degenerating into a TA thread.. here I'm doing pseudo-fly structures (sometimes bounded, sometimes unbounded, sometimes bounded on one side), so my P&L is partially related to direction, but also to IV and time (theta decay).

I agree that its best to keep an eye on the underlying to prevent worst-case scenarios, but ideally I'd like to come up with a ruleset that is independent of direction or even IV, with the only two variables involved being A) time in the trade and B) percentage of max profit (or max loss) incurred.

Of course, this might just be a fool's errand..

 

[Matt_ORATS]

You could backtest your set up and experiment with various exit strategies.

 

[newwurldmn]

hello all,

So.. I am often playing with pseudo-fly structures which have the maximum payoff at a certain strike and lose at the wings. I usually have a defined profit target at 25% of the maximum payoff, which seems a reasonable rule of thumb.

It happened however many times that the structure immediately gained 15%~20%, then went back almost to zero, then after one month finally reached the target. Clearly, in hindsight, had I taken immediately 15% that would have been a much better allocation of my capital.

So at this point I'm wondering: anyone here came up with some useful heuristic that links elapsed time and profit target? Care to share?

the sum of theta?

 

[Baozi]

the sum of theta?

Can you elaborate? Something like summing the theta of all legs and using it as a proxy for daily expected P&L?

 

[newwurldmn]

Can you elaborate? Something like summing the theta of all legs and using it as a proxy for daily expected P&L?

summing what your gamma/theta pnl should have been from inception to now. alternatively, how much of your pnl has come from vega/delta. If most of your pnl is vega/delta then you might want to cut. if it's inline with the gamma/theta then your thesis might still be intact.