The term "managing winners' refers to a closing a position before expiration. It is one of the "Early Exit" conditions you can specify on eDeltaPro Options Backtesting Software. Typically, you would exit a trade when it reaches a percentage of the maximum profit - for example 40% of Max Profit.
Managing Winners is considered a good trading practice as it:
- Reduces the "days held" and thus the time exposed to market risks
- Improves the risk-reward ratio (Once you reached your target profit, there is simply less money to be made for essentially carrying the same risk)
- Improves the win ratio
We did a backtest study to verify these claims.
We started with a 1 Standard Deviation Strangle, that is:
- Short 16 Delta PU
- Short 16 Delta CALL
- 45 DTE
- 10+ Years (Jan 2005 to June 2018)
We compared letting the trade close at expiration and with an early exit condition of 50% of Max Profit. When a trade was closed because it reached that profit target we immediately placed a new trade.
The early exit at 50% provided a greater total return. It also improved the trade in others aspects. While the average P/L for each trade was about the same, the daily P/L was substantially better ($2.04 vs $1.18).
The risk profile - as measured by the Standard deviation - also shows improvement for the early exit backtest.
In this study managing winners, - by an early exit at a specified target - did improve results. It increased the profit per day and reduced the average duration of each trade. As a result, an early exit increased the total return on the strategy. All while maintaining, or even slightly decreasing, the risk profile.
We backtest an options trading strategy to observe its real historical performance and discover a true winner using the eDeltaPro Options Backtesting Software.
The Basic Backtesting Workflow. How to setup and optimize a study based on empirical historical data. Step by step explanation with a real-life example.