As traders, we all understand that managing our portfolios is just as important as finding and deploying great ideas.
In that regard, it can be advantageous to approach each aspect of the trade management process in an equally methodical manner.
At a high level, the trade management cycle generally includes the following steps:
Trade monitoring/risk management
The third bullet point above - monitoring the trades in our portfolio - is one of the more time-consuming aspects of the trade management cycle. Depending on the position, this process can also vary to a high degree.
While some trades require little intervention and expire without incident, other trades require vigilance and associated risk-management decisions. If you've been looking for ways to make this process more systematic, we recommend reviewing a recent episode of Best Practices, which focuses on trade management targets.
What's most interesting about this particular episode is that new research is presented which can help traders set realistic expectations for managing profitable trades - especially as it relates to trade duration (number of days in the portfolio).
The graphic below highlights some popular options positions/strategies as well as associated trade management targets, which have been identified through previous tastytrade research. These targets were established by backtesting historical trading data to ascertain which profit management strategy levels produced the most optimal risk-vs-reward profile:
While the above data can provide traders with important guidelines for managing trades in their portfolios, more context on such targets can make them even more powerful. On the balance of the aforementioned episode of Best Practices, the hosts present new tastytrade research which dovetails extremely well with the information on the slide above.
Using historical data in SPY, the Best Practices team backtested each of the positions/strategies in the slide above to compute the average number of days it took to reach a range of different profit targets.
For example, the slide below highlights the results of this examination for the strangle. While the 50% target demonstrated the most optimal behavior, traders may decide they prefer a different level based on their own unique strategy and risk profile:
As you can see in the slide above, the 50% profit management target was on average achieved 19 days after trade deployment (assuming 45 DTE maturity). However, traders targeting a 40% profit management target only waited on average 10 days to close the trade.
The highlight of this research is that the data can help traders set appropriate expectations for the duration of trades in their portfolio - especially those traders that leverage a profit management methodology.
If you’re looking to adopt an approach such as this, or to optimize your existing strategy, the information included in this episode should be extremely helpful. We hope you’ll take the time to review the complete episode of Best Practices when your schedule allows.
If you have any questions about management targets, or any other aspect of the trade life cycle, we hope you’ll leave a message in the space below, or reach out directly at email@example.com.
Thanks for reading!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.