We Analyzed 20,000 Options Trades: Here’s What We Learned About Position Swings

Traders hate leaving money on the table. But, how do you know when to exit a position? How much profit do you give up by closing a trade early? What if a winning trade goes against you because you held out for more profit? 

These are real scenarios traders face every day, and this blog gives you valuable context for making those decisions. 

We examined over 20,000 options trades to see how long it takes for winners to turn into losers, losers to turn into winners, and the length of time between position extremes.

All research data is anonymous - No personal identifiers or brokerage account information is ever used. Trade statistics that come directly from the platform include only non-identifiable position details such as entry and exit date, strategy type, underlying symbol, and performance metrics. Our research team analyzes this anonymized data to better understand how traders use our platform and share objective research insights with our community.

We know no one has a crystal ball and hindsight is 20/20. The next time you consider your position management decisions, we hope this research gives you actionable context as you weigh the possibilities. Let’s dig in.

Position Types and Market Conditions

Our study included more than 20,000 options trades on eight different strategies over six months. The market had been in a steady uptrend, so traders held mostly bullish positions during the period studied.

Most positions were short duration, with the average trade open for 5.4 days.

After the extended uptrend, markets became choppy, providing ideal conditions to study swings in position value.

The Magnitude of Position Value Swings

A position’s final P&L only tells part of the story. Position returns can vary widely before exiting the trade. 

Two metrics describe these position swings. 

• Maximum favorable excursion (MFE) is the highest profit reached at any point while the position is open. 
• Maximum adverse excursion (MAE) is the largest unrealized loss during a position’s duration.

MFE tells the trader how much profit they “left on the table.” MAE quantifies how the position performed relative to its largest drawdown.

During the period studied, traders missed out on the most upside while trading iron butterflies, long calls, and long puts.

Interestingly, iron butterflies also had the highest MAE. This can probably be attributed to short at-the-money contracts’ gamma exposure.

Trying to capture all the missed profit and catch every market move for each position is a fool’s errand and unrealistic. Still, smart adjustments to bot decisions and personal trading rules could enable traders to capture a few dollars of lost profit to produce more powerful compounding. 

For example, traders could adjust profit targets, use multiple profit targets depending on days until expiration, trail positions with SmartStops, or automatically adjust all of these parameters and more based on current market conditions with bot switches. 

Timing of Position Profitability

We can go one step further and analyze the time between profit extremes. 

Why? Understanding the time between position extremes gives you insight into position duration and trade management.

For example, knowing that iron condors had a longer average time between their max profit and loss can help you adjust exit criteria or give you more confidence when being patient with your exits.

There is high variability in the time between a position’s maximum and minimum profit. The average iron condor was open 9.1 days and the average days between max profit and max loss was 5.4 days. So, swings in position value relative to the time the position was open are significant.  

How This Impacts Your Trading

From all that data and research, here’s what stands out.

Some strategies have much higher favorable and adverse excursions (e.g., iron butterfly, long calls, and long puts).

If you know your strategy’s typical return profile, you can make more informed trading decisions.

For example, if you trade iron condors, you have to consider the return profile looks different than trading put credit spreads. An iron condor’s neutral profile means two sides of the trade are in play. So, the time between a position’s maximum and minimum return can be longer than a one-sided trade like a put credit spread or call credit spread. 

Meanwhile, the variability between position highs and lows is smaller for iron condors than any of the eight strategies tested. 

The point is not to extol the virtues of iron condors, but to demonstrate that strategies have their own unique return profiles. 

Can a position turn around? You bet. It goes both ways, though. There’s often a two or three-day difference between the position’s highest and lowest unrealized returns on short-duration trades. 

Understanding the variability of your favorite strategy’s returns gives you unique insight into your management decisions and can help remove emotional decision-making from your trading.

Automating your iron condor and iron butterfly strategies is a great way to remove emotional trading decisions.