Exiting Options Trades Automatically

Exiting Options Trades Automatically

Hey everyone this is Kirk here again at Option
Alpha.com and this video we are gonna talk about Exiting Options trades Automatically. So as we discussed in the last video, trade
entry is an important aspect of successful trading. And probably more important obviously then
making adjustments to trades. Now in our opinion All of your “analysis”
or “thought” should go into placing smarter trades from the start. And that’s really where we focus all of our
attention here at Option Alpha. Therefore, the easiest part of trading actually
should be the exit. It shouldn’t be complicated and it needs to
be automated as much as possible to help remove your emotions. That’s the way that we believe, you should
be trading. Meaning a lot of your thought process your
analysis entering the right trade, once your in the right trade, the exiting part should
be pretty much automated and not emotional as much as possible. So here at Option Alpha we favor placing a
“GTC” or good to cancel closing order immediately following each and every new position that
you enter. Again, we have outlined the specific profit
targets in a simple PDF guide that we have right here in the membership area. I just kinda want to cover some of these right
now, so that you can understand how this works, so this is what you will see as you download
the PDF guide, Again its completely free, you can you know take it with you its kinda
like your check list for how you should be using automatic exits and stop losses etc. And you can see here for Bullish Trades, lets
say we were doing a Bullish call debit spread, okay we want to take that trade off at 50
percent of max profit. So that means that if we enter that trade
lets say for one dollar, and we can make a dollar on the trade, then we want to take
that trade off once the trade increases in value to a dollar fifty. So, we entered it for a dollar, we can make
a dollar or lose a dollar. That means max potential profit is a dollar. We want to take that trade off once the value
goes up half of that max potential profit, or up to a dollar fifty, and again we will
go through some examples here. So you can understand that. And again what we usually try to do here is
make sure that we are maximizing both the number of wins that we have that’s why we
are trying to do this, and the potential money that we make. You can see some trades obviously we are gonna
be a little bit more aggressive in howl we take profits to put like broken wing butterfly
ah we are gonna be a little bit more aggressive, wait a little bit longer for a bigger profit. If we do a custom naked put or something like
that or a single naked option we’ll again wait for that 50 percent profit target. If we are doing things like calendars and
diagonal spreads we are actually going to take profits a little sooner because those
trades don’t have as good of a success rate on the outside meaning when you enter a calendar
spread or a diagonal spread, you don’t have the really really high probability of success
that you have with credit spread or an iron cons or something like that. So you want to take those profits off just
a little bit earlier. Again, we have also got guidelines on Neutral
Trades. So most of the neutral trading that we do,
we take profits at 50 percent of max profit. Except for things like straddles and iron
butterflys. Your going to be a little bit more aggressive
when you enter a straddle or an iron butterfly your gonna take in a bigger credit. Therefore you can actually afford to take
it off a little bit quicker. Meaning at a very short or very quick profit
target of 25 percent. So, again this can help you and guide you
as to where you need to exit these trades. And again this is based on a lot of data and
research. So, we also have Bearish Trades again I won’t
go through this one, but very similar to the Bullish Trades. But pretty much any strategy that you want
to trade, we’ve got guidelines on how you should be exiting those trades. So the question becomes why would we want
to exit trades early? I mean we’ve kinda covered it but again the
two biggest reasons why we would wanna exit trades early are to One increase our win rate
and profits. And number two reduces our trade duration
and exposure. So when we exit a trade early that means that
we are locking in a gain for sure, on a trade that could have gone the other way, right? So if you have a trade and it goes in your
direction early in the cycle or maybe right after you enter the trade. Why not take that trade off, bank the profit
and prevent an opportunity to hold onto the trade where it could turn around at the end
of the expiration cycle and go against you? So once you do that you will see that you
will actually increase your win rate and it will increase your overall profits. So even though you will be taking less money
on each trade, then you actually enter for credit you’ll actually have a much higher
profit at the end of the day, because your win rate is going to be dramatically higher. And again we will kind of prove this concept
with what we do here at Option Alpha. The second part of this is obviously is it
reduces trade duration and exposure. So if we enter a trade say 45 days out but
close it after 10 days. We only had money exposed for 10 days. We didn’t have money exposed for 45 days. Now does this always happen where we get to
close out trade 10 days early? Or 10 days into the cycle? No. Sometimes we do have to wait, and hold the
trades all the way to the expiration. But most of the time we are not in trades
more than 30 days. In fact right now as it kinda sets at the
time im doing this video our average trade duration across all of our trades is about
27 days. That means less than 30 days that we actually
have money invested into the market. Most of our trades are actually placed anywhere
between 45 and 60 days out. So we are closing trades at about half the
time right now, and again that reduces our exposure and the amount of money we have at
risk in the market. So, for example, lets assume on the next chart,
just to kinda prove this point here about why you should be closing out trades early. That you sold the same 43 calls and 40 puts
to create a strangle 3 months in a row. This is Strangle not Strange ( laughs)
So you created a strangle 3 months in a row back to back to back. Okay. Now this is a chart I believe of aal at the
time that we are actually doing this video it doesn’t really matter, but it proves the
concept. So again lets assume that the 43 calls are
here this is your line in the sand or your breaking print on the 43 calls. And then you sold the 40 puts down here below
the market as well. Okay. Now each of these red lines on the chart here
is expiration dates. So for just the sake of arguments here we
will assume that you entered a trade at the beginning of expiration and it was just a
one month trade which means that it expires the next expiration month, and then you entered
another trade here at the next expiration, you entered another trade here the next expiration
etc. etc. etc. etc. okay. So we will just assume that you keep entering
this same 43 40 strangle back to back to back. Now if you entered the trade here at the ex
point you have a lot of opportunity, because again you want they stoke to trade inside
of your range. You got a lot of opportunity to close out
this trade early in the cycle. Yes there was a lot of movement, but likely
as you got through that initial cycle you saw some time decay, maybe a drop in volatility,
whatever the case is, but you definitely saw the value of the options probably go down
because the stoke more or less trades sideways for about 20 days. Now if you had taken profits early you would
have been out of trade somewhere here, maybe 20 days in or so you would have taken profits
early been out of the trade. If you waited all the way till expiration
tried to kind of milk every last penny out of this trade, you might have been stick in
a situation where the stoke broke out above your strike prices. Okay. It came back in on the last day of expiration
but it actually closed outside of your strike prices the last day of expiration. Okay. So this kind of proves the concept that at
least in this first month you had a lot of opportunity early on int he expiration cycle
to take money off table. Probably multiple times you could of taken
money off the table. Had you waited and been maybe a little bit
greedy trying to get every last penny out of it you would of either been faced with
two scenarios where the stock would haver gone against you and maybe would of used the
stop loss order or something and it would of hit you out of the trade and not had profit. Lets assume that the next month comes and
the stock opens lower, but you continue to make that same trade so you place the trade
on this date, and again it probably took a couple of days this time for the trade to
come into a profitable range. Notice that the next expiration cycle that
we are trading here so the second month, it took almost eight or nine days for the stock
to come back inside of your 43 call 40 put range, but once it did you had a couple days
you had a window of opportunity here to take money off the table again. So early exit in this case actually ended
up being the best opportunity to make money in this trade because had you waited until
expiration which again which in this expiration cycle is this line right here. The stock actually closed outside of our potential
profit zone closed up around 44 dollars, and would have been a losing trade, Again if you
had waited all the way until expiration. So the person who closed out the trade early
in the middle of the cycle, even though they banked potentially a little bit less money
then they could of made if they hadn’t made a complete profit, they actually made money
versus this person who did not make money by holding it all the way til expiration. Okay
So same thing so we go to the next month, and again just kind of proves this concept. Lets say you enter a trade on this date, so
the next expiration cycle you enter a trade the first day of expiration, the first day
of the new month or the calendar month. And you can see that the stock comes into
your range early, but maybe you missed an opportunity to get out of it. Okay so for whatever reason the pricing wasn’t
there, you didn’t reach your 50 percent of profit target. Whatever the reason is but it came into your
range early but it just wasn’t a good exit or it didn’t hit our profit targets that early
in the cycle. But we did get another opportunity later on
in the cycle, maybe towards the back half of the expiration of the cycle, again maybe
20 days into it. We got an opportunity here where the stock
closed right in the middle of our range, about 20 days into the trading month. So we could of again closed out this trade
at a profit. By this time there is probably enough time
decay and volatility decay in the value of the options to actually take a profit off
the table. And again if you had done this and taken the
profit you would have avoided a scenario where the stock actually closed much higher than
our break even points again creating a loss at expiration. So as you continue to see this play out it
happened again the next month, and most stocks it happens all the time. But the reality is that you have to understand
is that as a trader you can not really dictate where the market goes, but you can be a little
bit opportunistic in the way that you take money off the table. So whenever the market is favorable, and reaches
a profit target early, or decays in value early, you have to be diligent in taking money
off the table. Now the challenge that most traders fall into
is that they don’t have the emotional competence to actually do that. Myself included sometimes we see a trade come
in into our range and we think okay now its going to you know stay in this range until
expiration, im gonna you know keep the entire profit that im really looking to get. But the reality is that sometimes that you
know stocks make big moves, and right before expiration, they make huge moves that either
turn them into full losers or maybe a winner into a loser, whatever the case is. We have to automate this process so that when
we remove ourselves as emotional traders and investors from the process so that whenever
it happens in that expiration cycle or that month we are out of the trade immediately. Another reason why I like to do this is because
then I don’t have to watch and manage my positions throughout the month. So if we are keeping our position size in
check or since we are keeping our potion size in check, we can hold these trades until our
profit target is reached. And that’s what I like about these automatic
closing orders is that I know that that order is always working for me, I don’t have to
constantly go in and monitor these trades to get them off. I we ill just get an email alert that says
the trade has been you know taken off our profit and I can go out of that trade. And I can focus on what’s more important,
which is finding new entries and new trades. So again sometimes this will happen early
in the cycle meaning you will get taken out for a profit early. Other times you might have to hold you know
20 25 days into the cycle or all the way until expiration. Before something turns around. For going back to the start here you can see
that if we traded another strangle, that same strangle the last month here, or the last
moth the trade really didn’t turn out to be a profitable trade until the last four or
five days of expiration. So you had to wait a long time for this trade
to come back in now this isn’t saying that we obviously sell a strangle like this if
the market was higher. We would obviously adjust the strike prices,
but im just trying to prove the concept that sometimes it takes a little bit longer for
trades to come in sometimes it happens early, sometimes it happens later in the expiration
cycle. So the reality is is that its not unreasonable
to increase your win rate by as much as ten percent or more by closing trades early and
taking profits. Meaning a 70 percent probability trade would
actually see 80 percent winners if profits were taken early and then trade when its closed
out. In fact we can actually kind of prove this
concept, because we published our performance and live stats all the time on Option Alpha
and our three course strategy just to give you a sample of this right now. Our three course strategy to which are strangles,
straddles, and credit spreads. All options selling strategy win at 84 percent
82 percent and 78 percent. Now if you think about it all of the trading
that we do here at Option Alpha is placed at the 70 percent probability of success level. So the fact that we are wining at 84 percent,
is just meaning that we are taking trades off you know so early, that we are actually
winning at about a 14 percent higher win rate with our strangles a 12 percent higher win
rate with our straddle and then 8 percent higher win rate with our credit spreads by
managing these trades early and banking these profits early. and that’s really again why we kind of place
trades around 70 percent chance of success because we know we can win about 84 percent
of the time. if we ended up placing trades around the 80
percent chance of success level, we might end up winning about 85 or 90 percent of the
time, but in our opinion its not worth giving up so much premium to go that high for an
initial probability of success level. but again this kind of proves the concept
that we are talking about here, you know when we actually go back and track all of our trades
and publish them live, in our performance stats. We defiantly see that our win rate is much
much higher than the initial probability level that we are covering. so lets actually go through a couple of examples
of current trades that we have on right now so that i can show you how we set up these
automatic closing trades, cause i think its really important and again this is based on
what we have right now at the time that im doing this video. so this is about as real as we can get. I have basically taken off a couple of the
working orders that we have, just so i can rebuild them here for you guys, and kind of
work through the process. so lets actually start here with some call
debit spreads that we have these are directionally bullish trades. so these are where we were being a couple
nat buyers of options trying to play a couple of these etfs a little bit higher. So if we go back to our slides here you can
see that if we are doing a Paul debit spreads which is a Bullish Trade, we wanna take these
trades off at 50 percent of max potential profit. so now going back to our thinker some platform
lets look at the first one here which is em, now em we actually bought for a 55 dollar
debit, the width of the strikes here is a dollar, so the max potential gain that we
could have on this trade is 45 dollars. so half of that, so again 50 percent of that
max potential gain, or half of that max potential gain, would be a profit of about 22 and a
half dollars. so lets just round it to down 22 dollars. so what we are gonna do is we are gonna add
22 dollars to the value of the contracts that we bought. because that’s what we wanna do, we wanna
increase the value of this contract, and hopefully take it off at a 50 percent of max profit
gain. so if we go here and right click on create
closing order to sell back these verticals and em. its going to bring up this order dialog box
and what were gonna do is create this contingency order that says OK basically buy these back
at 72 dollars. so basically what we are gonna do is add that
22 dollars to the 55 dollars that we had originally and we are gonna buy this back at 72 dollars. now remember maximum value of this spread
if it went all the way to expiration and was totally profitable is 100 dollars, that’s
the width of the strikes here. So we are gonna try taking it off early whenever
it reaches a 72 dollar value. and again we are just gonna put that 72 dollars
in here and now what we are gonna change is instead of doing a day order, we are gonna
say GTC and what GTC means is that its gonna be good until cancel meaning this order is
gonna work and its gonna try to get this trade off at 72 dollars, until it gets filled or
we hit expiration. and that’s all we e want to do. we want to let this trade work as long as
humanly possible. so i went ahead and placed this order , im
gonna hit send and so that order will not be working in the market. and now you can see in our order dialog box
up here, that we have our closing order, its a GTC order very similar to the sums of our
other trades and orders right here, its a GTC order that’s gonna get us out at 72 dollars,
whenever the value goes up to that price point. So right now the mark is at 55 which is almost
what we paid for the value of the spread, but its just gonna keep working, so as long
as this order keeps working for the next basically 50 days whenever we have an opportunity to
take money off the table, this order will automatically get us out i don’t really have
to think about this trade anymore because i know that i have already controlled my position
size, I know that i am willing to lose you know a couple about 150 dollars on this trade
if it doesn’t work out. but it should hopefully you know hit that
profit target. So again lets look at another one here with
FXI so FIX is another call debit spread that we are trading. and you can see that we paid for FIX a dollar
oh five. so we paid one oh five. now this is a two dollar wide spread, so its
gonna be a little bit different. in this case our max potential gain on this
trade is 95 dollars, because that’s the value of this spread. the spreads gonna be worth two dollars at
expiration. meaning that we can only make 95 dollars on
this trade if it were to go all the way to expiration and be profitable. so half of that 95 dollars is basically 47
and a half dollars. and again we will just round down you dont
have to be exact with you know 47 and a half dollars, but lets just say we wanna add 47
dollars of value to this contract. so if the contact starts at one oh five we
add the 47 dollar value. we are looking to close this trade when the
value of this contract goes up to 152 alright. So what we are gonna do is we are gonna do
the same thing we did with EM we are gonna right click here, create a closing order,
and we are gonna say sell and now we are gonna adjust this price to 152 which is our profit
target on FXI and again were gonna change the type of order from day order to GTC. so
i hit confirm and send, submit the order in, now in my order dialog box my working orders,
you can see the two orders that I have now created here. these are gonna be constantly work until they
get filled or until we reach expiration and we will just keep working through that. so lets go through a different one here, lets
look at this calender spread in SPY, So we are trading a calender spread in SPY we are
using a put calender spread. So we’ve got the May 200 put and we’ve got
the April 200 put. If we go back to our slides since we’re doing
a put calender spread, you can see that its a Bearish Trade, and our put calender spread
needs to be exited at a 25 percent gain of the net cost that we got to get into the trades. So a 25 percent gain means we are going to
take profits a little bit sooner. So once the value of the option goes up by
25 percent. So all we want to to in this case is look
at the value of the option that we paid, so this is 195, and we want to increase the value
of that option by 25 percent. So if we take 195 and increase it by 25 percent,
we’re looking at closing out this trade of a profit whenever the value of the spread
goes up to 243.So that’s again im rounding down here not using exact numbers. It’s 243.75. But if we want to take this trade off we are
going to enter a closing order, to close out this trade when the value goes up to 243. so again its going to be very similar to those
debit spreads but now you’re basing it off of the current price not the max potential
gain. So im going to create a closing order, i’m
going to type in here 243 to enter that automatic order, and again we are going to change it
to a GTC and confirm and send and submit the order. So now that that order is working in there
as well, again it’s going to get us out at 243 whenever the value of that calender in
SPY goes up to that price point. alright lets look at a couple more examples
here, lets look at some Iron Condors which are very similar to credit spreads. so if we look at for example Chipotle in this
example, we enter the Chipotle tray which is a neutral Iron Condor and we sold these
Iron Condors for a dollar 25 each. now this is a little bit different because
now we are on the options selling side, so our max potential profit, since we sold this
spread or this Iron Condor for a dollar 25 is the dollar 25 that we took in. If we go back to our slides here and we go
to the Neutral section you can see that if we are doing a balanced Iron Condor or just
an even Iron Condor, that we want to take money off the table or take profits whenever
the value or whenever we reach 50 percent of max profit. So again since we are selling Options the
value of the Option has to go down for us to make money. So 50 percent of the 125 that we have sold
means that we want to take this trade off when the value goes down to 62.50. Okay that’s our profit target on this trade. Right now it’s trading at 125 that’s what
we sold it for. that’s the max potential gain. Half of that gain or 50 percent of that gain
is six 25. So now when i go into buy back this order
to close. so right click on it and go to Buy Iron Condor
to close, now its going to create a buy order, and i want to buy it back whenever the value
goes down to lets say 62 dollars essentially 62 and a half, but lets just say 62 dollars. and again we are going to create this GTC
order. So once I submit this now this is going to
be working in our position activity statement, again you can see these different orders are
now working for SPy,FXI, EWW. This Chipotle order is now gonna buy this
thing back whenever the value decays back down to 62 dollars. Right now its worth about 92 and a half dollars. So we are making money on the Chipotle trade,
we’re making about 65 dollars on this trade. But we need to make a little more money on
this trade before we hit our profit target on this trade, meaning it’s gotta work just
a little bit longer before we are comfortable taking this thing off for a big profit. lets look at another example here with USO. Now in this case USO is a Iron Condor in think
or swim, but if you actually notice, this trade in the way that we send it out to our
members is an Iron Butterfly. And the reason it’s an Iron Butterfly is because
the short strikes or the contracts that we sold are at the same strike price. Okay and again if you sign up for a Pro or
Elite membership we always tell you if its an Iron Butterfly or an Iron Condor. But Think or Swim doesn’t have a way to distinguish
that its a Iron Butterfly, they just say that its a Iron Condor. So again if we go back to our actual position
statement here, or our slides here and take a look at where we take money off the table
with an Iron Butterfly. You can see that a Neutral Trade is an Iron
Butterfly takes money off the table when we have 25 percent of the max potential profit
or when we have made 25 percent of max potential profit. So we go back here and we look at USO you
can see that we sold this Iron Butterfly in USO for a dollar 45. So if we take this trade off at 25 percent
of that potential or making 25 percent of that max credit which is a dollar 45, we’d
be looking to take the trade off at around one oh eight. so a value of one oh eight, now you can see
right now that that trade is already in our profit zone. So we could go in and actually close out this
tray right now and remove the exposure and take profits and that’s exactly what we are
gonna do. I just wanna do this on the video with you
guys. So you can see it’s already inside of our
profit zone. If we had a working order a closing order
to get this thing off automatically it would have been you know submitted and filled at
one oh eight, but today it’s actually coming in around 99 dollars of value so we should
make about 136, 135 dollars by closing it out and buying it back for about a dollar. So we will submit that order, might get it
filled as we are kind of talking here on this video. But you can see that orders working right
now. We are going to buy it back at about a dollar. It’s worth about 99 dollars right now so we
are paying a little more than market value, but since we sold the spread at 145 we should
make some money on this trade as well. Okay So hopefully that’s a really good example
of how we can use a lot of these Contingent Orders in our favor. Again the key here is just remember that you
have to buy back orders that you had originally sold, and if you bought options you have to
sell them to close out the trade. And that’s really the key. But take your time with this. Make sure you go through our When to Exit
Guide I think that’s really key and understanding, you know why we close out trades really early. These are going to be really easy to follow
cheat sheets for you on Bullish, Bearish, and Neutral Trades. To make it insanely easy for you to place
these automatic closing orders. Now remember the more times that you can automate
this process the faster and faster your gonna be at increasing your win rate, and increasing
that potential profit so you have long term. So Thank You so much for checking out this
video. Hopefully it was really educational for you,
helped you out and understand why we close out trades early, how you can do it on your
end. If you have any comments or questions Please
ask them in the comment section right below. If you loved this video, thought it helpful,
please share it online, help spread the word about what we are trying do here at Option
Alpha and until next time Happy Trading.


  1. bobby smith says:

    Wow is all i can say Kirk,learned so so much thank you.

  2. Akshay Vemul says:

    great as always

  3. Moon Ho says:

    One quick question. The 50% target profit for example, does it includes the commission? Or exclude?

  4. Joe K says:

    Just starting to scratch the surface of you videos and podcasts. Finally understanding how options work thanks to you and your easy to follow along format. Thank you!

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