When is optimal to exit a trade? As you hopefully can guess “optimal” is extremely subjective.
There’s are TONS of colloquial “best practices” thrown around - X% profit in Y% of time. Traders (myself included) love to think about when we’re going to take a winning trade down to realize a win - because after all “you can’t go broke taking profits”.
The issue is you can and retail traders notoriously do. How? Because there are 2 sides of the equation and both WILL be realized by all traders. Wins AND losses.
Optimal profit taking is incredibly dependent on your risk management protocols. So that 50% max profit (for short premium strategies) may not actually be optimal. Same for the 30% max profit with greater than Y% of the time remaining.
These practices perpetuate an awful affliction for retail traders - taking profits prematurely and allowing losses to compound. It also runs contrary to a common theme of great traders, ADDING to positions working in our favor. Option sellers have very tight edges and after commissions and spreads, early profit taking (if not structured carefully) and erase any remaining edge.
This should be a mandatory read for all retail traders: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1872211
To determine a starting point for when to exit, consider the expectancy of your strategy. Then, you can tinker with different profit and loss taking protocols (marking and probability) and create a strategy that actually aligns with your approach.
One other tool at our disposal are stops. This is a favorite way for me to leave a trade on beyond my initial profit taking thresholds.
It’s important to spends just as much, if not more time considering our loss management protocols but that’s nowhere near as fun as postulating when we’re taking wins down. Just remember to do both.