Realistically speaking, what Tastytrade tells you is WRONG (in my opinion)
Simply put: you will likely make money using their strategies, but you will also leave a lot of money on the table.
Additionally, by entering trades at less than optimal times, you’re going to increase the probability of having to manage positions (my BIGGEST criticism of TastyTrade is that they trade way too often and tend to act like they have "unlimited bullets" when hunting, instead of conservatively using their ammunition wisely).
Although I have great respect for TastyTrade & it’s founder Tom Sosnoff, by closing out all your positions at 50% profit you’re leaving a lot of money on the table.
You’re missing out on considerable annual returns.
By following my strategy and learning how to exit an options trade at the optimal time, you will make up those missed percentage points.
This can be proven easily mathematically (as shown in the video above)
Now we're going to discover how to exit an options trade.
When should you buy to close or sell to close?
Let’s use Facebook as an example.
Early in January 2019 Facebook was trading around the $130-$132 range.
Let’s say you sold a naked option with a strike price of $120, and bought a $110 long put option.
Hypothetically speaking, you will collect a $3 Premium on the $120 Put, while the put you bought will cost $1.
By doing this spread you will collect $2 in net premium, and by selling it naked you will collect $3.
According to Tastytrade’s recommendations, you should close out the spread at $1 and the naked option at $1.5 (closing out both positions at a 50% profit).
However, this does NOT make sense mathematically, and here is why.
The decay of the higher priced option (the option that you sell) will lead your profits.
It’s crucial to keep this in consideration.
When you close out the spread at $1, you will buy back your $120 Put at $1.20 and sell your $110 Put for $0.20.
As a result, on a net basis your $110 put decayed $0.80 while your $120 put decayed $1.80.
This is exactly where you’re leaving A LOT of money on the table.
Remember: the risk of the trade is with the short put. If you’re willing to wait for the $120 put on the spread to decay to $1.20, why wouldn’t you wait for the naked option to decay to $1.20?
The spread is primarily used simply for capital efficiency purposes.
Giving up an incremental 10% - 15% of premium makes zero sense.
In this example, you should close out the naked option at 60% and the vertical at 50%.
My research has indicated that closing out naked options at a 60% - 65% profit and closing vertical credit spreads for a 50% profit is the most optimal way to make money when trading options.
If you close out all your positions at 50% then you're missing out on 10% - 15% of additional premium on every trade.
This adds up over time.
With options trading, everyone has a different opinion on closing options trades.
While I believe that selling naked options will almost always be a better choice than selling a spread (because it provides you with more freedom and flexibility), I believe it's best to close out spreads at a 50% profit and naked options at a 60% or 65% profit.
Leaving 10-15% of option premium on the table (when following TastyTrade's advice) is not smart.
For more information checkout BestStockStrategy.com.and enter your email address and receive over 50% percent over $400 worth of free options trading information.
