How I Exit Short Strangles
I like to take trades off at 50% of my original credit – provided there were no adjustments to the trade.
When adjustments happen, it’s a little more nuanced.
If the adjustments brought in additional credit, then I’ll still seek to make the original profit amount. I’m not looking to be greedy.
But I become quite a bit more discretionary in my decision-making when adjustments eat into our campaign credit. In a case where there isn’t much credit left over for me at all, I will look to scratch out of the trade, buying it back for whatever my current net credit happens to be.
Generally, I don’t like bidding less than 50 cents to close a spread because that means I’ll likely have to hold the spread longer and closer to expiration, leaving me exposed to more gamma risk than I’m comfortable with. If buying-to-close the position at 50 cents leaves me with a loss on the trade, so be it. But it’s worth it to take risk off the table in a trade that simply isn’t working.
In other words, when a trade isn’t working as planned, defense becomes my top priority. If I can make a profit on it, great. But my main focus moves to how I can limit my potential losses.
Trade 'em Well,
Sean McLaughlin
Chief Options Strategist
All Star Charts, Technical Analysis Research