Managing Winners, Managing Early And Managing Based On Theta

Managing Winners & Managing At 21 DTE

“Managing winners” is a concept laid out by tastytrade, whereby one closes his/her position when 50% of the initial credit received is reached. However, it remains a subjective method to rebalancing your portfolio as reaching 10% of your profit potential in one day may force you to take your profits of the table. So, it’s far from prescriptive as it depends on what kind of positions you have on, what IVR environment were in… I’m a big believer in looking at IVR and portfolio theta to figure out when to take profits in positions that have the highest P/L %. To me, it’s about dissecting the whole picture because as long as you have attractive time decay in an underlying but declining IVR, why would you take it off as boosting your daily theta isn’t necessary? The better you understand high IVR, the wider your profit zone will be and the more profit you will generate. In that regard, selling short strangles isn’t about rolling the dice, it’s about trading consistently and letting time work for you.

Tastytrade’s research team conducted the following study utilizing 25% of your capital (in all IVR environments):

The results show us that if you put on trades for 25% of your capital, holding to expiration doesn’t make sense at all. The results are even worse if you take on more risk. The opposite is true for managing early at 21 DTE regardless of how your portfolio is doing. In other words, holding to expiration yielded the same P/L, but saw larger losses while keeping your positions 45 days open. Less reward for more risk. A lot of that has to do with gamma risk, which will be highlighted in my next newsletter. You can sign up for a free sample HERE.

Theta

The following study combined “Managing Early” and “Managing @ 50%” whichever comes first. This is precisely what we do based on our daily theta numbers (and we actually have a higher win rate as we’re selling 10 delta strangles instead of 16 delta ones and capture more profits because of high IVR): looking at the positions that should be taken off if they contribute little to our daily theta.

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