Closing Options Trade: How To Exit An Option Trade | BestStockStrategy.com
BestStockStrategy.com – Options Trading with David Jaffee
Share this and Enter to Win a Free Phone Call!
closing options trades

Closing Options Trades: Why TastyTrade & Option Alpha are Wrong

Closing options trades: "When should I exit a trade?" "How should I manage a winning options trade?”

There are quite a few misconceptions about the best time to close options trades (whether it's a naked option or a spread).

This post will teach you how to exit an options trade

Tastytrade.com believes that both spreads and naked options should be closed out at a 50% profit (although since my video came out, they've updated their recommendation to manage positions at 21 days).

Option Alpha recommends the same thing.

TastyTrade is the only other YouTube channel that I recommend (besides YouTube.com/BestStockStrategy) and I believe that Tom Sosnoff and Tony Battista are profitable traders in the options market.

They encourage traders to Sell Option Premium and trade small.

Selling option premium is the only way to make money consistently in the stock market.

However, I believe there are a lot of inaccurat information regarding closing and managing trades.

Will you make money by closing positions at 50%? Yes

Will you achieve optimal returns by closing out your trades at 50%? Absolutely NOT

Instantly Be a Successful & Profitable Trader

Follow My Trades with Real-Time Trade Alerts

Closing Options Trades: Bad Information

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)

Key Points: Closing Options Trades

1

We Close Out Our Trades Early

2

We Patiently Wait for the Great Opportunities

3

We Close Naked Options at ~65% Profit and Spreads at 50% Profit

"This is how we earn our money. We close out our trades early, we only trade the most stable underlyings, and we patiently wait for great opportunities to arise." - David Jaffee, BestStockStrategy.com

Click to Tweet

Instantly Be a Successful & Profitable Trader with our Trade Alerts Special Offer

Closing Option Trades: Most Optimal Strategy for Managing Winning Trades

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.

Closing Option Trades: Use Limit Orders

It is crucial to use limit orders with this strategy.

For example, let’s say you sell a $250 naked put in Lockheed Martin for $2 of premium.

Immediately after the trade fills, you would then ​submit a buy to close, good-to-cancel ("GTC") order with a strike price of anywhere between 70 to 80 cents. This would allow you to keep 60% to 65% of the premium, 10% - 15% more than Tastytrade recommends.

If you wanted to sell a spread by selling the $250 Put and buying a $230 put for a net premium of $1, once this trade fills you would submit a buy to close order that would have a limit good-to-cancel price of $0.50.

Again, it makes no sense to close out spreads and naked options at the same price.

Even with a spread, you’re still assuming risk by waiting for the option you sell to decay even more than it would if you sold a naked option.

Take the BEST options trading education course and become a profitable trader

Discover the Best Trading Strategy for Consistent Profits


  • Learn how to earn consistent profits in the stock market while also reducing risk.
  • Step-by-step education course reveals everything you need and caters to ALL traders (absolute beginners through advanced traders)
  • Responsive Email Support

Closing Options Trades Conclusion

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.

About the Author David Jaffee

I (David Jaffee) help people become consistently profitable traders while minimizing risk. I graduated from an Ivy League University and worked at some of Wall Street's most successful investment banks. Subscribe to my YouTube channel for valuable videos - BestStockStrategy YouTube Channel​. Finally, if you're looking to Land a Finance Job, then I've put together the best step-by-step course at LandaFinanceJob.com. My personal website is DavidJaffee.com.

follow me on:

Leave a Comment:

4 comments
Michael says July 11, 2019

I reviewed your July ’18 eTrade statement and I see a number of closing trades, on or close to the position expiration date, where it is closed for a couple of pennies. I understand your logic for taking profit at 65%, for naked positions, and would like to understand the thought process applied when you carry a trade to near expiration and presumably beyond the 65% profit point.

Reply
Alex says July 8, 2019

What do you advice someone who just started selling options do? I have a small account of $3,000. Planning on sticking to Robinhood until I build it more and then transfer somewhere else that will allow iron condors, strangles, and naked options. Currently I’m just doing bull put spreads far out of the money on stocks you recommend. Raytheon Lockheed Chase etc

Reply
    David Jaffee says July 9, 2019

    I’d recommend that you get comfortable with the strategy so that you can earn consistent profits. It sounds like you’re disciplined, which is great. I would also recommend signing up for Tastyworks. You can use this link and get a free week of my trade alerts once you fund your account with $2,000:

    https://start.tastyworks.com/#/login?referralCode=7R6QHPKFNC

    Reply
Add Your Reply
>