TT - MM: Managing Winners, 08/29/13

TastyTrade - Market Measures

• The trading industry tells us to always manage our risk.
• If everyone is always managing their risk, and no one is making money, how does managing our risk work?
• Screw managing risk! Let’s just manage our winners!

• Underlying assumptions could be about the stock, the stock’s volatility, or the sector.

• If I've made 50% of my potential in one day then it makes no sense to hold for 39 more days.
• If I've made 60% of my profit with 50% of the time remaining I should probably cash in.
• Underlying conditions:
• If I'm short premium and premium starts to increase...
• If I'm short delta and the market starts to rally…
• Overall portfolio: How is my P/L?

• If we've made 90% with 2 weeks to go it makes no sense to stay in.

• A 1 standard deviation strangle has a 32% chance of losing and a 68% chance of staying between the strikes and expiring.
• (Shorting a strangle is a naked position and therefore carries a large margin requirement.)
• TastyTrade video: Standard Deviation 1 from 18-Jun-2012 (starts at 2:00), or YouTube.

• SBUX, AAPL, NFLX: all had monster runs, one way or the other in the past 2 years.
• AAPL and NFLX had exaggerated moves in both directions.
• SBUX had one-way move up.
• We chose a strangle which in reality wants a stock to stay within a specific range.

• Suppose you sold a SPY strangle for $1 and bought it back when it dropped to $0.75, it would have been profitable 100% of the time. (.25 net out of 1.00 potential)
• Holding until 50% profit only lost once and produced both higher profits and profits per day.
• Holding out for more than 50% produced more losers, a negligible increase in profits, and a lower average profit per day.
• Therefore, optimal target % was between 25 and 50% of maximum potential profit.
• Avg. P/L per Day = (P/L) / (avg # of days held) / (24 cycles)