12/30 Decision-Making Process: Should I stay or should I go?

I've shut down the RUT condor Today, now the key in this decision is not so much the action, but rather the decision-making process involved. I was starting to wonder if I should leave the position hedged for a longer period of time, or maybe jump with another type of adjustment. This type of thinking starts to clutter my mind when I find myself with a position in peril and hedged. It will lead into another set of thinking pattern: "man, I hate losing, I shouldn't give up, let me add something to make it work"..

There comes a point in time when trading must be treated like a business that it is, this point comes in different stages for different traders, but this has become cornerstone for me in the past few days.. I've reviewed all my trades, adjustments, decisions, thinking patterns and what not, and like I mentioned before, have started updating my trading plan for 2010. One of my goals is to establish a few strategies and trade them consistently month in, month out.

So, back to the decision making process: How can you turn doubt into conviction? If I simply closed the trade with that kind of thinking pattern in my mind, I'm 100% sure I'd spend the day walking around upset for taking a loss.

The answer is simple: Run a decision-making tree, and follow its advice/recommendations based on a the simple math of risk & probability & outcome. After I finished the exercise I'll describe bellow, my closing the trade decision came from a position of power. I simply knew it was the right thing to do and just went about doing it. Now, I'm feeling much better and confident I can come back next month and enter the trade again.


Step 1) Decide between a few adjustment options. My first step was to look at possible adjustments and come up with the best alternative. Here are the adjustment options I came up with:

A) Close trade, enter a new Low Prob condor
B) Close trade, enter a new High Prob Condor
C) Close the PUT spread, roll up the Call side and enter an iron-condor

The profiles are pictured bellow:






Once I knew the options, I also knew that once I went with adjusting, I'd have to hold this trade through expiration so it meant forgetting about current P/L and stop loss levels and use the break-even levels and probabilities it will stay within the B/E strikes as the new trade approach.

I ran the decision tree on the alternatives, and it came up with the Low Prob (Alternative A) being the best option.


Next step: Stay, Close or adjust? Same process, this time I took the Low Prob probabilities and outcomes and ran the decision tree to give me the best outcome. It told me to shut down the position as it is the less risky alternative.


I started peeling off the call spreads, then the PUT spreads didn't come off. So I wondered: should I even close the PUT side?? What do you think I did next? A new decision tree, this time it tells me that given probabilities, the best alternative is to leave them on, but notice here the margin is not so big between closing and leaving it open, so I feel that I can deviate from the decision tree and make the case for closing the PUT side: if a black swan event decides to happen right with those PUTs, I'll be very upset, much more upset than I am for giving up the extra $30 or $40 bucks I give up by closing them up.



Cheers!
Gustavo