Remember this quote: “You cannot go broke taking a profit.”
When is your primary exit not your primary exit?When you consider the annualized rate of return.
Last Thursday, I posted a JCG Bull Put MAY 45/47.50 as an Options Animal Plus Trade. Max Risk: $1.48 Max. Profit: $1.02. My primary exit was to let the trade expire worthless.The expected duration of the trade was 29 days.
I closed this trade today.After only 4 days, I was able to far exceed my primary exit on an annualized basis.
Let’s do the math on the trade:
The original trade was targeting the maximum profit at $1.02, with a maximum risk of $1.48.That is a 68% ROI (actually, it is the Return On Risk – but it’s essentially the same thing.)On an annualized basis, which accounts for the duration of the trade, this 867% annualized rate of return.The math on that is: ROI x (365/duration of the trade).In this case, we were planning to be in the trade for 29 days.
ROI = 1.02 / 1.48 = 68%
Annualized Return = 68% x (365/29) = 867%
In only 4 days, I was able to exit the trade with a $0.57 profit.That is a 39% ROI.However, considering the duration, it is a 3510% annualized return. This far exceeded my Primary Exit in a much shorter timeframe than anticipated.It is a very respectable profit and it allows me to take that risk off the table and use my capital to enter another trade.
Just a word on my entry into the trade: my original trade was pretty aggressive and placed near the money.This approach should only be considered when you are confident of a bullish move.This trade would have worked in a stagnant or even slightly bearish trend.However, a very bearish move would have been difficult to adjust.
We always tell you to have your trading plan – always define your primary and secondary exits.When documented my primary exit for this trade I specifically mentioned that I would exit the trade early if I could meet my annualized return before expiration.
As a simple rule of thumb if you can get half of your profit in half of the expected duration of the trade, you have met your primary exit.
Raise that white “W” flag and put it in the win column!