There's an ocean of analytical studies on the tastytrade website that suggest actively managing winning trades can help improve your average profit and win rate.
One commonly referenced approach to trade management at tastytrade is to close positions when they achieve 50% of potential profit - as you can learn about in the following links:
Because we're always looking to refine and improve our approach to portfolio management, the Market Measures team recently analyzed whether the same type of active management could also benefit losing trades.
In order to better understand this question, the guys designed two studies using data from 2005 to present in the S&P 500. The first study backtested selling a 1 standard deviation strangle with approximately 45 days-to-expiration and then compared the performance when holding to expiration or closing the trade when the amount of the loss reached 1x, 2x, 3x, 4x, and 5x the amount of capital originally deployed.
As you can see below, contrary to many of the studies conducted on managing winners, this study suggests that holding losers through expiration may ultimately maximize average profit and win rate:
It should be noted that this study also shows that holding a losing position through expiration can expose a trader to the biggest potential loss of any in the comparison group.
In order to provide additional context on the management of losers, the Market Measures team took the next step and also investigated the cumulative performance (the first study looked at average performance) of these trades using the same parameters and peer group.
Interestingly, the data once again indicated that holding losing positions through expiration helped to maximize average profit and win rate.
Each and every trader has their own approach to capital/risk management and therefore may not be comfortable holding losing positions when they go south. However, the data presented on Market Measures may still provide insight into how you might refine your approach to portfolio management.
If you have an existing method of dealing with losing positions that you’ve found successful, or have any questions above the material in this post, we hope you'll reach out at firstname.lastname@example.org or leave a comment below.
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.