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: https://www3.gotomeeting.com/register/767892214
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”
Seth what was the advantage of neutralizing with more options, rather than just exiting, that last fly?
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?
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.
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].