Today we're discussing the rationale behind our standard 50% profit target strategy and how it contrasts with other trading styles like day trading and swing trading. This question was brought up last week in our discord and it makes for a great discussion. If you would like to join a friendly group of likeminded traders join our discord it's free!
Let's get started!
Have you ever wondered why math-based options traders aim to close positions once we hit the 50% profit mark? The logic is pretty simple yet profound. When an options trade reaches 50% of its max profit, the risk/reward dynamic starts to tip, and it's not in our favor. We stand to gain less but still could lose big. This isn't the same as when we are trading shares of an underlying and we continue to to have a large amount of delta with the same risk profile like we do with shares.
This risk/reward scenario is where the 50% profit target strategy comes in. When we close the trade we lock in a nice return, we say thanks and we look for another trade because we just freed up capital. This minimizes our risk while maximizing our wins - in essence, we're playing it smart.
Day trading and swing trading typically aim for a profit target of at least 1.2 or 2.4 times the risked capital. The reason for this is simple: we are dealing with shares of stock. The game is all about price action and technical analysis. As swing or day traders, we're trying to profit from short-term price movements and are usually less concerned with implied volatility or probabilities.
As options traders we're playing a different game. A lot of the time we're not trying to exactly predict short-term price movements - we're guessing on a general direction, but we mainly are playing probabilities and managing risk. We know the market can be unpredictable so we focus on winning the long game by putting statistics and research to our advantage.
So why 50%?
It reduces risk: When you close your position at 50% profit, you're not just bagging half the potential profit, but you're also dramatically reducing the risk of a future price swing wiping out your gains. This is because the maximum profit that can be made from the trade is now only 50% of the original max profit, but the potential loss could still be significant.
It frees up capital: Closing the trade at 50% profit allows you to free up funds that can be put to work in new, fresh trades. It's like a revolving door of opportunity - as one door closes, another opens. This approach allows us to maintain a higher turnover of trades, which aligns with the mantra of "trade small, trade often".
It aligns with our GKT motto: trade small, trade often, trade mechanically. By keeping our trades small and frequent, we can continually reap the benefits of diversification and probability. And by sticking to our mechanical trading plan, we remove the emotional aspects that can often lead to poor decision-making.
Setting a 50% profit target is a key part of our options trading strategy at GKT. It's a simple yet powerful technique that allows us to manage risk, free up capital, and stay focused on our long-term trading goals. And while it's different from day trading and swing trading, remember - in the end, diversification is still important, having multiple strategies and different tools in your trading tool box is how we stay profitable!
Disclaimer: As with any strategy in trading, this isn't guaranteed to always result in success and should be employed as part of a broader risk management strategy. We all have to continue to learn and adapt our strategies with the market. It's important to understand the market dynamics to optimize your own trading plan. This is our goal at GKT!
Keep trading the GKT way, Good Kids and remember, the game of options trading is all about playing smart, not hard: lets keep it simple.