What Triggers an Early Exit?

What is an Early Exit?

First lets define what is an early exit condition is?

An early exit condition is any condition that closes the trade before its expiration date. 

For example, if you specify that

"Exit condition: 50% of max profit"

The backtesting engine will close the trade if at any time before expiration, the price of the option contract(s) allows you to reach your 50% profit target. The system will then reopen a new position or wait depending on your follow up instructions. These follow up instructions are called "Re-Entry" conditions.

Early Exit Triggers:

So, anytime you close your trade before expiration it is considered an EARLY EXIT. Early exits are triggered by:

1. Good news; you reached your profit target (As mentioned before)
2. The mechanics; your game plan dictates that you close the trade “x” days before expiration
3. Bad News: The trade went against you and you have now a losing trade

eDelta Backtesting engine allows you to activate these early exit conditions on the main panel. You may activate the triggers or not. You can also activate several conditions simultaneously. 

You can indicate your choice of conditions that can be used on your backtests to trigger an early exit, as follows:

1. Exit at Profit

Option Seller (Short Premium): Select the percentage of max profit. Max profit define as the total premium you received. For example, if you choose a 50%, the Engine will close the trade if the price drops to 50% of the original premium. In short premium, the value of profit is between 0 and 100%.

Option Buyer: The exit can be programmed at any value. For example 150% of the premium paid.

2. Exit @ DTE

You may specify how many days before expiration the engine will close each trade. For example, you may specify to enter a trade at 45 DTE and exit at ten days before expiration (10 DTE). eDeltaPro will open a new position the closest it can find to 45 days. This position will be mechanically closed 10 days before expiration. 

You may chose to combine conditions. For example, you can specify to close the trade at 40% of Profit AND 10 DTE. The engine will close the trade if ANY of these two conditions are met. If the profit target is reached at anytime on the life of the contract, the trade will be closed. If the profit target is not reached, then the position will be closed at 10 days before expiration (10 DTE) no matter the price of the contract(s).

Exits When Loss - Defensive Tactics

eDeltaPro considers two types of exits when the trade goes against you. The first one is a Stop Loss. The second type is to execute a roll. There are 4 different rolls programmed into the engine that you can choose from. The next article explains Rolls in detail.

3. Stop Loss

You simply specify the percentage of loss at which the trade must be closed. For example, for a short option,  if you specify a Stop Loss at 200%, and you received a premium of $1.45, the trade will be closed what its price reaches $4.35 (3x the premium received).

4. When Tested

The last trigger for early exit is when the strategy is tested. Meaning that the price of the underling reaches the price of the strike.

Re-Entry

Every time there is an early exit, triggered by any of the above conditions, you can select to Re-Entry and open a new trade. See next article Re-entry conditions for details.

eDelta Backtesting engine allows you to choose individually what the re entry tactic is for each of the triggers.