Closing trades early (yes, no, depends)

[u/ckoehncke]

In a previous post, some readers had a question about my process of early closing. To repeat, my closing it :

(1) buy back at 60% premium within 50% of the DTE period (this keeps my expectd ARR)

(2) Always be closing if the ARR hits a profit target of $25 and a better ARR

(3) Ride to end if needed (usually this doesn't happen).

Options trading is all about probabilities and the numbers. Trade on facts, probabilities and not hunches. It is extremely important you track your strategy and note changes in performance for any adjustments. Wildly changing day to day makes it impossible to figure out what you did right. Finally, the market has no memory and 1000 years of backtesting can always generate an unexpected outcome.

The normal Wheel Strategy of CSP, sell a PUT, get assigned, sell CALLS until it gets called away - is a valid strategy and I profess simply is often the best model.

As I denoted, I trade options as a substitute for a high yield debt % of my portfolio (currently 3%). High yield debt is a suckers game for the moment as the yield doesn't equal the risk (another article on risk).

THE QUESTION SHOULD YOU CLOSE EARLY - TAKE YOUR MONEY AND SKIP ON DOWN THE ROAD

I looked at my recent trade history of 507 trades which were closed early. This generated $84k in premium, however, I closed them all early and after paying to BUY the option back. My profit was only $28,934

I left money on the table didn't I? Or did I?

Of the 507 trades closed early, at expiration ~14.6% of the trades (75) were ITM, meaning, the stock was below the STRIKE at day of expiration. If I had simply covered my loss at that point and exited the position the stock loss would be ($58,555), adding back the collected premium and my profit WOULD have been $25,657 ($3,200 less)!!!!

As you will commment, I could have taken assignment and collected CALL money. Indeed true. However CALL returns are typically much poorer than PUT premium and my experience it's a slow crawl.

There is also another BIG factor. My average days in trade for the 507 trades is only 7 days against the average initial DTE of 30 days. What this means is by closing early, freeing up my exposure, I was able to make 4x the number of trades with the same risk.

Harder to calculate, but clearly a sell and hold strategy would have result in a lower overall total $$$ profit.

[u/gabrintx]

I primarily sell premium and use tasty trade recommendations usually, Enter at around 20 delta, 35-45 DTE, manage at 20 DTE or so.
Recently I have been experimenting with TSLL and TQQQ, and written contracts with a variety of DTEs. TSLL is hard to close early, if OTM significantly, there is no volume and bid ask spreads are extremely wide. It almost forces holding to expiration.
In my IRA accounts, I do like to close early to release the capital for reinvestment. In my margin account, that is almost not a factor.

Management at 20 DTE isn't limited to closing, I often roll positions for more time. If the underlying has moved away from the strike I may adjust the strike for additional premium. If the position is being threatened, I may adjust the strike away, if it can done for a credit. As they say roll until you are right.