Exit Strategy

When I first started selling options, I only hold till expiration.  I was lucky that most of the trades expired worthless.  I was also 'fortunate' to receive the assignment notice in my early trading days, which I described in this post.

After more reading and more experience selling options, my exit strategy has changed.  The book that influences me most is "Profiting with Iron Condor Options", by Michael Benlifa.

Assuming that the Iron Condor was sold for 17% credit base on margin require, ie 17% Return On Margin (ROM).  Say, it is $170 credit on $1000 margin.

Chart from "Profiting with Iron Condor Options", by Michael Benlifa.

The option expire in 72 days.  Base on the theoretical yield curve (assuming everything remains the same), you can forecast your P&L from the day of your trade till expiration.

After 18 days, you will be able to keep 5% (ie $50) out of the 17%.  This represent 29% of the total credit.  You have still 54 days to expiration.  Those 18 days represent only 25% of the total length of the contract (72 days).

If you wait 36 days, you could keep 12% (ie $120) out of the 17%.  This represent 71% of the total credit and 50% of the total length of the contract (72 days).

You could decide to wait the entire 72 days with the idea of keeping the entire credit (i.e. $170).

Chart from "Profiting with Iron Condor Options", by Michael Benlifa.

As you can see from the above Time risk versus reward chart, the best risk/reward ratio is 50% of the total length of the contract (72 days).

Michael explains that it may not worth to chase for the remain 29% (i.e. $50) by staying in the market for another 36 days.  Things may go wrong.  The wining trade can start to lose money. 

He also explains that if you are content with 5% ROM (which is good by anybody's standard), don't take the risk for another 54 days.

Thanks for his insight, my exit strategy has changed.  I usually take profit when I have >70% credit.  I don't hold the option till expiration anymore.

I may not explain his concept very well.  Go read the book.  It has many good ideas, concept.  Although it is a small book (can finish in 1 day), but I keep going back for reference, for ideas.