When to Close Out an Options Trade

I generally like the research done at the firm TastyLive (which used to be called TastyTrade).

They say it’s wise to “manage your winners” at 50% profit.

This is because:

• A trade that reaches 50% profit still has a chance of a loss, so take the profit (increased win percentage)
• The remaining profit is only 50% of what it was when you opened the trade (more risk vs less reward)
• If the 50% profit is reached quickly, you can reduce the amount of time in the trade and open a new trade (increased annual rate of return)

I recently opened a PayPal vertical call spread for around $4 per contract. As of today, only three days later, I could sell this spread for $5.50. So, I have made $1.50 (or around 4%) in 3 days.

My maximum profit from this trade is $6 per contract (the $10 difference of the strikes minus the $4 I paid). So, according to tastylive, I should look to sell it when I hit a $3 profit (50% of the $6 maximum).

Now, here’s the thing. I entered this as a long-term trade. I had almost 2 YEARS to make this $6. So, if I can make $3 in a few days, the math says I should take the win and move on to another trade. There is no sense in waiting almost 2 YEARS to see if I can make another $3.

Tomorrow, I will enter a limit sell order on the stock for a $3 profit (sell price of $7 for the contract I paid $4 for). And if by some chance this price hits, I’ll be happy to take the profit and look to do it again with another stock. Or again with PayPal at different strikes.