You have placed your trade, and now you wait. There are 2 outcomes – your trade is either profitable or not. But there are still some things you can do to gain the edge before closing the trade. Managing your trades after they have been executed is integral to becoming profitable in the long term. 

The Psychological Need to Win

We all have a natural inclination to want to win. Nobody likes losing and in trading, many people equate losing to closing a losing trade. This leads to bad habits like holding on to losers for too long or adding on to losing trades, and closing winners too early to grab that quick "victory" even if it goes against your overall trading plan. To change one's psychology to be beneficial for trading, we need to redefine what winning is in the trading environment. Most inexperienced traders would define winning as closing out a profitable trade every single time - a near impossible feat as the market does not take into account your analysis before moving. This can be frustrating but happens often enough to even experienced traders. So, what does it mean to "win" in trading? Ultimately, our goal as traders is to make a profit. This does not mean we have to be profitable every trade, but rather, be profitable in the long run. A trading strategy that only has 30% of winning trades is still an effective strategy if it produces profit in the long run. Someone who has a win rate of 80% could still be losing money from trading. Traders need to shift their mindset from focusing on winning every single trade, and rather focus on being disciplined enough to follow their strategy, accept that losses are part of the game and use risk and money management best practices so they can trade another day and be profitable in the long-term. While this sounds simple, many people still focus on winning the battle and not the war. 

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Gains Required to Breakeven after a Loss

When growing your trading account, assuming each trade generates the same percentage return, account growth looks similar to an exponential function. For example, a 5% gain on a $5000 account gives $250 but a 5% gain on a $10000 account gives $500. A larger trading account gives more buying power and therefore a larger dollar return on winning trades. The same logic is applied to drawdowns and the gains required to get back to breakeven. The chart below shows that the relationship between losses incurred in percentages, and how much % gain is required to breakeven is represented as an exponential function. A 10% drawdown only requires an 11% gain to get back to the starting point but a 80% drawdown requires 400%. The less risk per trade, the easier it is to recover if that trade moves against you. As a general rule of thumb, portfolio losses greater than 25% are very difficult to recover from. 

Rolling options positions

The key to becoming profitable long-term is to minimize losses while maximizing your winners and not take profit too early. The graph above displays how difficult it is to recover from losses. Keeping losses small is one half of the equation, but maximizing winners is what traders should be paying more attention to. Maximizing your winners can be achieved by rolling your trades. 

A roll strategy in the options world is defined as closing an existing option position and opening a new option in a single order. The following roll strategies should only be used when the trade is in profit. This is done when either the target price has not been met, when more time is needed or when the price target has been raised:

1. Target price not met example - a trader is currently long 10 $100 Calls @ $3 ($3000 premium paid) with a target of $110. There has only been a modest directional move to $105 with 3 weeks to expiration.
   In this case, the roll strategy could be to close half the position by selling 5 of the $100 calls @ $6 ($3000 premium received). This allows the trader to still have 5 contracts exposed until expiration while eliminating the full $3000 risk. This roll strategy requires at least 2-3 weeks remaining before expiration. 

2. Time extension example - a trader is currently long 10 Aug $100 Calls @ $3 ($3000 premium paid) with a target of $110. There has only been a modest directional move to $105 with 3 weeks to expiration.
   In this case, the roll strategy would be to sell all 10 Aug $100 Calls @ $6 ($6000 premium received) and buy 8 Sept $100 Calls @ $7 ($5600 premium paid). This strategy allows the trader to effectively finance the next month for free. The overall risk on this trade has been reduced from $3000 to $2600. Leverage has also decreased as only 8 Sept contracts are bought using the premium paid from selling the 10 Aug contracts. Do buy contracts that exceed the amount received from selling the original contracts. 

3. Price target raised example - a trader is currently long 10 $100 Calls @ $3 ($3000 premium paid) with a target of $110. There has been a quick directional move to $107 with 5 weeks to expiration.
   In this case, the roll strategy would be to sell all 10 $100 Calls @ $10 (10000 premium received) and buy 15 $110 Calls @ $7 ($7500 premium paid), This creates a net credit of $2500 and the overall risk is therefore reduced from $3000 to $500. Long exposure is maintained with lower risk and an increase in leverage as there are now 15 contracts. 

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Summary

It is important to remember that the end goal is to become profitable over the long term and not to “win” by having many profitable trades. Even if you have very few losing trades, if the loss incurred is larger than multiple winning trades, it eats away at your long-term profitability and eats away at your trading account. Keeping losing trades small and maximizing winning trades is easier said than done due to the psychology in play, naturally we all want to win even if it is a small profit and want to let our losing trades run in the hope that it reverses. However, this is not a viable solution as every trader will have losing trades, it’s part of the game and largely out of your control. By rolling options and maximizing your winners, your losing trades have less of an impact on your trading performance.

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