07/16 Daily Summary

NOTE: I Would like to invite you to read the SPY Double Diagonal Decision Making post, please let me know your comments, thoughts, suggestions. Thanks!

The market kept pushing higher Today, I adjusted my SPY Double Diagonal and kept on with my capital allocation process. I entered the MNX Iron Butterfly Today and intend to enter the RUT 30-Day condor and IBM calendar next week.

I also continued to do the MNX Iron Butterfly backtesting. I added the JUL/09 simulated trade results. By doing this, I realized I didn't do too bad with my own live trade, I thought I had over-adjusted, which I might have, but the JUL/09 simulated trade was also on the maintenance-intensive side.

Detailed Positions:
SPY Double Diagonal Decision Making
07/16 MNX Iron Butterfly Backtesting
07/16 MNX Iron Butterfly *New*
07/16 SPY Double Diagonal

07/16 SPY Double Diagonal Decision Making

Before I even begin, let me repeat my new trading mantra:

"In trading (and in life), no matter what you do, there is always a possible outcome that will prove you wrong. Be not afraid of being wrong."

So, like in any other business venture, success is a matter of making better decisions at least 50% of the time, being wrong is just part of the game. That being said, Yesterday I was debating between either closing the trade, adjusting, or simply doing nothing. Instead of going into an eternal battle in my head about each option, I used an objective decision making tool called "decision tree".

In a decision tree, each branch is a course of action, for each course of action you may have one or more outcomes. Each outcome has a probability of happening, and a monetary outcome for when it happens. Ok, ok, it is confusing I know, it is easier by looking at the charts:

The first picture, shows the results for a scenario using the probability of touching my stop loss point in 1 Week, it also displays the max potential profit if we stay in range during this 1 week. As you can see, doing nothing has a higher possible outcome, becausing adjusting will cost me money, money I won't see back in 1 week.

The same result is true for 3 weeks:

For 4 weeks, assuming that I'll get out with my target profit if I don't adjust, the adjustment scenario wins, this is because the probability of touching the max loss is a lot bigger when you consider the SPY will have a lot more time to run around

What was my conclusion from this excercise? First and foremost, that both options are valid and can potentially prove you to be a genius or...Not! :) It all depends on your time-frame and willingness to accept a higher risk of hitting stop loss.

For me, it helped me to see that rolling the CALL spreads will only pay off at the end of the trade's life. It is a longer-term decision, therefore, I should not expect to be up in profits really quickly. I also saw very clearly that if price retraces tomorrow or next week, not adjusting would be the best option. One way or another, I know I'm risk averse and would not like to see price approaching my stop loss point without me doing anything about it. This let me to keep with the plan and make the adjustment.

Now, it also showed me what I knew in the back of my mind: Closing the trade and locking in the loss is not a good option in any time-frame. Why? Simply because you guarantee 100% probability of losing the money, the other two options will at least give you some probability of making some money. That's what the game is all about, isn't it? Making Money?

07/16 MNX Iron Butterfly Backtesting

Performed the backtesting for JUL/09 Contracts. Notice that we reached 10% ROI in less than 10 days, that would be my cue to exit the trade, if one wanted to go for 15 or 20% it could be attained by working the trade.

PS: I'm keeping detailed records for these backtests, my plan is to publish them at the end of the week and keep updating them as I move along. I will zip the spreadsheets and publish it later on, for now, here is the volatility cone and backtest log for the JUL/09 trade:

JUL/09: 10% ROI


Previous Postings
07/15 Backtest Challenge

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07/16 MNX Iron Butterfly *New*

Today I entered this new position, I plan on managing with the same strategy I'm using while backtesting, it includes a few course of actions that I feel are the best way for me to ease into managing iron Butterflies.

I did not cut the delta in 1/2 with the long CALL, I cut 1/3 of the original deltas and decided to leave it a bit more bearish because of the recent price action, I expect some easing off the tops, if I'm wrong I may add a long CALL sooner than expected. Other than that, here is the Iron Butterfly managing plan I intend to use:

1) Do nothing for the first week, unless we get within less than 1 st. deviation from the short strike
2) For adjusting, use one of the following:
a) Add back-mong (SEP/09 )Long CALLS/PUTS to cut Delta
b) Add small (half the original size) Iron Butterfly to add Theta and adjust Delta
c) Use Vertical Debit Spread to roll "Delta Hogs" (Short contracts with delta of 70 or more)
d) Simply close out "Delta Hogs"

07/16 SPY Double Diagonal

As per my Double Diagonal Adjustment plan, when we reached the short strike I rolled 2 contracts and cut the delta in 1/2. My goal when rolling was to do it with the least possible ammount of contracts, to keep the original ones working for as long as possible, should the market retrace, this will be helpful.

Yesterday I spent some time analyzing the best course of action (Close, adjust or do nothing?) and came up with some pretty interesting conclusions, I'll post them in a separate blog entry. I also realized something that I'm making my trading mantra:

"In trading (and in life), no matter what you do, there is always a possible outcome that will prove you wrong. Be not afraid of being wrong."

Position's History:
07/15 SPY Double Diagonal
07/14 SPY Double Diagonal
07/13 SPY Double Diagonal *New*