OAP 071: The 2 Major Misconceptions About Exiting Option Trades Early

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For years now I've talked about the concept of exiting option trades early and taking money off the table as a way to both improve your win rates and increase overall profitability. Still, I'll often get emails and questions about the legitimacy of exiting trades early vs. letting profitable trades go all the way to expiration and "milking it for all its worth" as some members have put it. Honestly, I can't blame anyone for questioning it because on paper it sounds crazy. Close a trade early for half the potential profit, and you'll make more money - who would believe that right?

Today, we'll present another case study that proves why the two biggest misconceptions about exiting trades early are completely wrong. Not only will you see why taking profits before expiration increases your win rate but you'll also hear how it helps reduce the magnitude of drawdowns and increase your average profit per trade. Once you see the results of these four backtested short strangles in TLT, a major bond ETF, I'm confident you'll quickly change your opinion and start implementing some of the automatic profit targets we suggest in your own portfolio.

Two Major Misconceptions of Closing Options Trades Early:

  1. Taking trades off early reduces the potential profit of the positions.
  2. When you take trades off early, you still have the same win rate over time and therefore your return is much less.

Why do we close trades early?

  • With early exits, the win rate is dramatically higher.
  • Drawdowns for closing trades early are less than if left until expiration.
  • Implied volatility is overstated, so you win more than the initial probability suggests.
  • Get into recycling capital at a faster pace, which all leads to a higher total profit.
  • Take off profitable trades early that could potentially turn into losses later on.
  • When you leave trades on longer, you expose them to more risk for loss.
  • The same concept holds true with short-term and long-term periods.

Four Tests With TLT (Major Bond ETF):

10 Day Expiration Level

  • Short strangles were entered into on average about 10 days to go until expiration.
  • Each short leg on the short strangle on TLT was sold at the 30 Delta.
  • Every time a trade was closed, entered into a new trade sequentially.
  • No IV filter, no exit/stop-loss filter, just entered trades consistently over time.
  • Tested the difference between letting the trade go all the way to expiration and taking the trade off early, once it has reached 50% of the profit target.

Example: if a short strangle is sold for $100, will take it off once it has decayed in value by $50 and there is a $50 profit -- sell for $100 and buy back for $50.


Scenario A — short strangle, 10 days to expiration, 30 delta options on each side, no filter, all the way to expiration (no early exit/close).

  • Annual national return, on average, was 0.66%.
  • Max drawdown during the period was 15.51%.
  • Average P&L per trade was $8.94.
  • Strategy win rate over the entire period was 64.84%.
  • Average days in trade was 10, with about 90 trades tested.
  • Total strategy P&L was 327% over the period.

Scenario B — early exit at 50% profit target.

  • Annual return was 1.37%.
  • Maximum drawdown was 8.3%.
  • Average P&L per trade was $11.19.
  • Strategy win rate was 83.57%.
  • Average days in trade was 7, with 140 trades tested.
  • Total strategy P&L was 858%.

60 Day Expiration Level

  • Short strangle at the 30 delta, 60 days on average until expiration.
  • Tested the difference between no profit target, and taking a 75% profit target.


Scenario A — trade left all the way to expiration, 60 days.

  • Annual return was 1.24%.
  • Maximum drawdown was 14.94%.
  • Average P&L per trade was $25.70.
  • Win rate was 71.15%.
  • Average days in trade was 60.
  • Overall P&L percentage was 511% during the period.

Scenario B — used an exit target of 75% profit.

  • Annual return was 1.81%.
  • Maximum drawdown was 14.25%.
  • Average P&L per trade was $33.32.
  • Win rate was 75.93%
  • Average days in trade 54, making about 3 extra trades on average.
  • Overall strategy P&L percentage at the end of the period was 679%.


  • When you close out trades early, you increase your potential profit.
  • With early exit strategies, you recycle capital at a much faster pace and cut down on some of the trades that could have been bigger losers if left until expiration.
  • In most cases, ROI will increase by 1-2 X across the board.

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  • Options Basics [20 Videos]Whether you're a completely new trader or an experienced trader, you'll still need to master the basics. The goal of this section is to help lay the groundwork for your education with some simple, yet important lessons surrounding options.
  • Finding & Placing Trades [26 Videos]Successful options trading is 100% dependent on your ability to find and enter trades that give you an "edge" in the market. This module helps teach you how to scan properly for and select the best strategies to execute smarter option trades each day.
  • Pricing & Volatility [12 Videos]This module includes lessons on mastering implied volatility and premium pricing for specific strategies. We'll also look at IV relativeness and percentiles which help you determine the best strategy to use for each and every possible market setup.
  • Neutral Options Strategies [7 Videos]The beauty of options is that you can trade the market within a neutral range either up or down. You'll learn to love sideways and range bound markets because of the opportunity to build non-directional strategies that profit if the stock goes up, down or nowhere at all.
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  • Implied Volatility (IV) Percentile Rank [3 Pages]A cool, simple visual tool to help you understand how we should be trading based on the current IV rank of any particular stock and the best strategies for each blocked section of IV.
  • Guide to Trade Size & Allocation [8 Pages]Helping you figure out exactly how to calculate new position size as well as how much you should be allocating to your each position based on your overall portfolio balance.
  • When to Exit/Manage Trades [7 Pages]Broken down by option strategy we'll give you concrete guidelines on the best exit points and prices for each trade type to maximize your win rate and profits long-term.
  • 7-Step Trade Entry Checklist [10 Pages]Our top 7 things you should be double-checking before you enter your next trading. This quick checklist will help keep you out of harms way by making sure you make smarter entries.

Real-Money, LIVE Trading:

  • IWM Iron Butterfly (Closing Trade): Exiting this IWM iron butterfly options trade gave us a $1,100+ profit after pinning the stock price one day before expiration at the peak of our spread.
  • CMG Iron Condor (Opening Trade): I just recorded my live trading platform (and real money account) as I walked through the process of entering a new iron condor trade in CMG stock. Inside you'll see me analyze, price and fill the trade in real-time.
  • APC Strangle (Closing Trade): Took about $150 out of this small APC strangle trade even after the stock moved completely against our short call strikes this month. But as always, implied volatility always trumps direction and because IV went down, the value of this spread dropped more-so than the impact of the directional move higher.
  • IYR Call Credit Spread (Adjusting Trade): This adjustment is good for 2 reasons. First, it reduces the overall risk in the trade if IYR continues to move higher. Second, it still leaves room for the stock to fall back down into our new profit window.
  • XHB Straddle (Closing Trade): We were able to bank a $120 profit early in the March expiration cycle for our XHB straddle with the stock trading right in the middle of our expected range.
  • AAPL Call Calendar (Opening Trade): Look behind the scenes as I use our new watchlist software to filter quickly and find this AAPL call calendar spread trade during overall low implied volatility in the market.
  • COF Strangle (Adjusting Trade): Here I recorded my live trading screen (and real money account) showing you the entire thought process we used to make an adjustment to my current short strangle in COF to reduce risk.
  • GDX Strangle (Opening Trade): With gold's high IV we are getting into a new strangle with a 70% chance of success and a decent credit for selling option premium.
  • IBB Iron Condor (Closing Trade): Today we're exiting an iron condor we traded in IBB for a $142 profit. Inside you'll see me analyze the exit price and fill the trade in real-time.

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About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.