Exit Strategy

Properly exiting a position is a key part of a successful trading strategy. This week, I’ve got an interesting problem on my hands.

Last week, on the 20th of December I put on a killer papermoney trade. I was able to get a great price on a pull put spread. For a $0.69 credit, I was able to sell the 670/660 January vertical spread, with the sitting at about 750 or so. Over the past few days the index has shot up and is now sitting right around 795.

Last night, I did a quick check on the option chains and noticed that the price for this spread has dropped to a range of $0.20 – $0.05. That means that I could likely buy this spread back for about a nickel or so.

The question now becomes what to do? I sold 75 contracts that expire in January and now have a the option to unravel the position and take the risk off of the table. Here are the things that I’m considering as I make the decision…

Do I need the margin dollars?
What is the calculated risk that is still in play on the trade?
How much will it cost to take the trade off the table?
Has anything changed since I have put on the trade that makes me feel as though it needs to be closed?
Is there anything else to consider?

So, given those questions, lets run it down for the papermoney account…

For the papermoney account, nope. I don’t need the margin dollars at all. There is plenty of margin available in this account.
The calculated risk has dropped to almost nothing.
Very likely, I could buy this position back for about $0.10 without any issues. Of course, you need to take into account commissions as well.
There isn’t much that has changed in the marketplace since I put on the trade. The markets have moved up, but then again they had been moving down hard before I put it on.
The only thing else on the trade that I would consider during this time of the year is taxes. Since this is a fake account, I don’t really care. However, I would consider this for my personal account.

So where does this all leave me? Well, I think the best bet here is to just sit tight and watch what the market does. I am sitting on a massive 120 point or so cushion on this position and I don’t see any real reason to give away more 13% or so of the profit based upon the risk.

I will consider this further for my personal account and post an update if I chose to unwind my personal position. I feel pretty good about the entire position, I will look at the tax implications as the week progresses. I won’t go into all the details of this here – just talk to your accountant!

However, if the market turns the other way and begins to run hard down, I will not hesitate to take my money and run – in both accounts! Anyhow, I hope your Christmas is great and that your trading year has been profitable. While I haven’t made a lot of trades in the account this year, it has been another very good one!

Merry Christmas!