Although it's not productive to dwell on negatives, losing is a part of life.

When we experience a setback, learning from it and moving forward is typically a prudent course of action.

In trading, losing isn't an exception to the rule - losing is a part of the game.

Nobody wins on 100% of the trades they deploy - winning on 51% of your trades is actually enough to produce a positive trading P/L if the positions are scaled equitably.

If we assume that some losses are unavoidable, then the optimal course of action is to manage our losing positions in order to limit the damage. By minimizing our losses, and maximizing our winners, we can subsequently increase our P/L.

The above means that losers need to be consciously addressed - and in an ideal world there's a systematic way of doing so.

The tastytrade financial network has created and presented considerable content related to managing losers - all of which is available through the search functionality on the tastytrade homepage.

Along those lines, a recent episode of Market Measures presents a slightly different approach to managing losers that builds on previous research.

In this episode, titled "Alternative to Managing Losers," the Market Measures team explores whether managing losers according to a set period of time performs better relative to managing losers according to a set amount of loss.

In order to evaluate this comparison, the team ran several different studies on the same data and analyzed the results.

The parameters of the study included the following:

  • Using data from SPY, 2005 to present

  • Selling 1 standard deviation strangles, closest to 45 days-to-expiration (DTE)

  • Open new position after closing the old one

After designing the backtest according to the above guidelines, the team ran six scenarios that involved managing (closing) losing positions at 1x, 2x, 3x, 4x, 5x the credit received, as compared to managing (closing) losing positions with 21 days-to-expiration (DTE).

As you can see from the graphic below, the strategy focused on managing losing positions with 21 DTE outperformed managing losers according to a set amount of loss:

While the performance of such an approach (managing according to a set window of time) will certainly vary by strategy, in this particular data set the early management of losers appears to have helped in reducing large losses and dampening the overall volatility of portfolio returns.

We hope you'll take the time to watch the entire episode focused on alternative approaches to managing losers when your schedule allows.

If you have any comments or questions, please don't hesitate to follow up at support@tastytrade.com.

Thanks for being a part of the tastytrade community!


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.