Maximizing Profits: Legging Out of a Winning Options Spread

Seth FreudbergGeneral Comments, Options Education, Seth Freudberg's Blogs, Trading Lesson, Trading Theory4 Comments

Nothing is more frustrating to an options spread trader than working a trade for 30-60 days, using all of your skills and knowledge to initiate, adjust and improvise to position the trade for a nice win and then, on the day you have decided to exit and pocket that   profit,  you run into execution problems. There is nothing quite  like watching the  substantial  profit  that you thought you were going to lock in,  turn into a tiny profit or even a loss on the day you planned to exit, causing all of the work of your last 30-60 days to  go down the drain.

And there is no options spread trader out there who has not experienced this  killer situation at least once.

There are three basic principles that I use to exit profitable trades and over time they have served me well:

1. If you are up a solid amount on a spread trade and the market is quiet, you might want to take a hard look at exiting that day.  On quiet days, the possibility of a strong adverse move in the midst of executing your exit  are much lower on quiet boring days in the market.

2. In the midst of exiting, unless you have a strong directional bias that day, make sure to keep your deltas close to neutral in the exit process.

3. Closing shorts positions closest  to the money as the first step in exiting the trade,  is often a great way to cut the delta/gamma risk of the exit process.

This morning I exited my June SPX butterfly trade with a nice gain (yes in options trading you can close a  June trade  in May…it sounds weird but it happens all the time) . The market was rallying and according to my approach to trading this particular butterfly, it was time to take my profits.

While this morning’s rally was fairly strong at first, it did back off by one hour  after the opening bell  (which is normally the earliest that  I will begin  my exit of  a trade) leaving a more mellow market environment within which to  engineer my exit. That’s really important.

My  first move involved selling off two thirds of a put side    butterfly that was really hurting my deltas. This cut my deltas down substantially  preventing a renewed rally from taking a bite out of the profits I was trying to  preserve.

Next,  I sold off 75% of my call side butterfly that constituted the majority of the capital left in the trade once I sold off most of the  put side butterfly.  While that would appear to put me back into the negative delta situation that I had just extricated myself from earlier (which it did to some extent),    the remaining capital I had in the trade was so small that whether I was negative or positive deltas was of little consequence–in other words most of the profit was locked down at this point.

What was left after the first two transactions was a very small, perfectly symmetrical  double butterfly that I exited by use of  buying a condor to neutralize the deltas of the trade until expiration day.

What’s important about this story is not whether I made or lost money on the trade. What is important is that over time, I developed a series of  principles that guided my successful exit of profitable trades and I followed them today. They might have worked or failed–Mr. Market will always be the final arbiter of that outcome. But by developing principles that work for me and then following those principles, I give myself the best chance at a successful outcome. This is what we teach at SMB–finding the trades that work for you and having the disciplines to follow your time-tested approaches.

Options Tribe meeting today at 5pm EST. Hope to see you there. We’ll be going over how to scan for profitable trading opportunities. Register Here:

Seth Freudberg

Director,  SMB Options Training Program

The SMB Options Training Program is a program designed for novice and intermediate level options traders who are seeking an intensive training process to learn how to trade options spreads for monthly income. For more information on this program contact Seth Freudberg: [email protected].

4 Comments on “Maximizing Profits: Legging Out of a Winning Options Spread”

  1. Seth what was the advantage of neutralizing with more options, rather than just exiting, that last fly?

  2. I can relate to the problem you describe Seth, as I quite regularly trade double calendar spreads and over the course of a month, can accumulate quite a number of concurrent positions.

    I would be grateful though, if you could explain more specifically, how you practically implement point (2) – “keep your deltas neutral in the exit process”. Does your broker give you this information? Or is there some analysis software you recommend that will enable you to see this?

  3.  Andrew I actually blogged on this very point a few weeks ago. Here’s a quote from it which I think  answers your question:
    Martin is asking about a trade in which there were two butterfly
    spreads open at the same time. The two spreads created two large zones
    of profitability such that if the market price of the SPX index stayed
    in  a  certain price range within those zones, the trade could be exited
    at a profit. The trade had hit a profit level that in my judgement was
    about as good as it was going to get, so at that point I had decided to
    exit the trade and take my profits.

    I had a choice–I could have attempted to exit the trade by simply
    selling both butterflies. That would have worked theoretically, but in
    reality, as the market is always in motion, the likelihood is that one
    of my sell orders would have been triggered as the market moved towards
    the center of one of the butterflies and I would have ended up chasing
    the price downward to sell my other butterfly. This is not always the
    case, but having been burned during  this process more than once, I have
    decided that I am not going to expose myself to that problem.

    The technique we’ve developed to close double butterflies involves buying a
    condor with the long strikes cancelling the short strikes of the two
    butterflies. When done in the right proportion, this has the effect of
    completely neutralizing the trade so that  no market movement in any
    direction  changes the P and L of the trade through to expiration. The
    benefit of handling the exit this way is that  it effectively   closes
    both butterflies in one transaction and therefore eliminates the
    execution risk of trying to close both butterflies simultaneously. I
    have found that I consistently get good results when handling the exit 
    of a double butterfly this way.


  4. I use Optionvue to enable me to assess my deltas, although most online broker platforms give you some delta information by which this can be determined as well. If you want more information on this you can email me at [email protected].

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