06/22 Trading styles within the income trading strategies

There are several different trading styles when it comes to trading income strategies with options:

0) Pray and hope: no guidelines, put a large condor and pray and hope price won't bust your trading account. I've done that in my early stages of options trading, scary as it seems, it works a lot of times, but then and again you come accross an October, and you can give away all your trading capital + emotional strenght to come back the next month.

1) So far I have taken the guideline-driven approach, where I would make adjustment to my trades at pre-determined levels using criteria such as the position in relation to the break-even levels at expiration, the delta of short strikes, etc. For this approach, you're not expecting profitability every month, you expect to be profitable over one year. You are very likely to make more than 15% per year.

2) Incremental approach: When I started trading the Iron Butterflies with Dan Harvey's guidelines, a new style appeared: make incremental adjustments based on the T+1 line and taking into account current P&L levels. This is a far more active approach, however, if done properly, it ensures no big draw-downs and even though you adjust more often, there is a plenty of money in the iron butterflies to make sure you can still make your target. You expect to make money every month, the market may beat you out of your cash in one or two months in a year, but it won't be twice as much what you usually make when you win.

What you like best depends on how you are treating your money. I agree with Dan's analogy between: dinner & movie vs. mortage payment. If you're trading for extra cash, and you don't really depend on that cash for a living, taking a guideline-driven approach makes more sense. If you are trading for a living, then it makes sense to protect your capital and stay more active in the trades to make sure you defend your capital against large price swings.

Today provided me a clear distinction: Both the SPY Double Diagonal and RUT 30-Day condor gave back about 3% of profit + the weekend time decay with Today's action. The Iron Butterfly gave back nothing, in fact P&L actually improved by 1%, which means it kept some of the money it made over the weekend.

Needless to say, I'm leaning more towards the active approach. Please realize, I'm not day-trading those!! I have pre-defined contingent orders to bring the deltas back in line if they start to go crazy with me. I also have contingent orders on the guideline-driven trades.

Today I started an SPX Iron Butterfly. It was done on paper trading because of its size and because it is my first shot at managing an index iron butterfly. I have a feeling they are easier to deal with because of their low gamma. We'll see.

Cheers!
Gustavo