The mayor of Dorset, Minnesota has been in that office for ¼ of his entire life. You see, Bobby T. is only 4 years old. He was first elected at age 3 and now at the ripe age of 4 he is preparing for a re-election campaign. First order of business – no tax on ice cream.
Last week we talked about setting pre established profit targets for our trades and sticking to them. Over the long run this helps our bottom line and tends to lessen the emotion ups and downs that some experience during the trade. There is however a time when we might deviate from pre set targets. That would typically occur when we have the opportunity to take a quick profit.
For example, if I buy a butterfly for $20 and am looking for a 15% profit I would place my offer at $23. But what is someone comes in 7 days later and wants to pay $22 for a 10% profit? Whether or not you sell is based on how you view profit maximization vs. profit optimization. Profit maximization is our ultimate profit target. We want to maximize our trade profit within our trade time constraints. Optimization takes time into consideration. Am I willing to take less profit in exchange for less time (and risk) in the trade? There is no hard yes or no on this however one way to consider the trade off is to compare both profit targets on an annualized basis. Assuming it takes us 30 days to achieve our 15% target, that would be a compounded annual return of approximately 447%. Compounded annualized return on a 10% profit achieved over 7 days is over 14,000%. So based on these metrics, taking 10% in 7 days might make sense. And that does not even quantify the fact we are taking risk off the table when we close out our trade early.