08/10 Daily Summary

It was nice not giving back all the weekend profits for a change! I appreciated that we didn't move too much one direction or another and my two remaining positions are still standing.

Me and my partner (aka Wife) have pretty much decided to focus on the strategy that worked best for us thus far: the Iron Butterfly. I will be trading this strategy only for the next few months in an effort to improve my management and learning from it. I also am going to trade a smaller IBM calendar, as the calendar is another trading strategy I didn't get hit too badly in the past. So, for SEP my plan is to trade 2 iron Butterflies (DIA and MNX) and 1 IBM Calendar.

Speaking of Iron Butterflies, I started backtesting the MNX Iron Butterfly a while back, and now have to do the same for the DIA Iron Butterfly. I find that by backtesting I can short-circuit some of the learning feedback. It takes one full month for a trade to evolve, and we can review an entire month in one or two hours of backtesting.

Position's Details:
08/10 IBM Calendar
08/10 MNX Iron Butterfly

MNX Iron Butterfly Backtesting:
FEB09: 07/21 MNX Iron Butterfly Backtesting
MAR09: 07/20 MNX Iron Butterfly Backtesting
APR09: 07/17 MNX Iron Butterfly Backtesting
MAY and JUN09: 07/15 Backtest Challenge
JUL09: 07/16 MNX Iron Butterfly Backtesting

08/10 IBM Calendar

The position is pumping profits, I like it!



Position's History:
08/07 IBM Calendar
08/06 IBM Calendar
08/05 IBM Calendar
08/04 IBM Calendar
08/03 IBM Calendar
07/31 IBM Calendar
07/30 IBM Calendar
07/29 IBM Calendar
07/28 IBM Calendar
07/27 IBM Calendar *New*

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08/10 MNX Iron Butterfly

The position made a nice recovery over the weekend, we're basically at the B/E level, I've added the next adjustment points in the chart and am looking for a recovery if we stay put or go down a bit more Tomorrow.



Position's History
08/07 MNX Iron Butterfly
08/06 MNX Iron Butterfly
08/05 MNX Iron Butterfly
08/04 MNX Iron Butterfly
08/03 MNX Iron Butterfly
07/31 MNX Iron Butterfly
07/30 MNX Iron Butterfly
07/29 MNX Iron Butterfly
07/28 MNX Iron Butterfly
07/27 MNX Iron Butterfly
07/23 MNX Iron Butterfly
07/22 MNX Iron Butterfly
7/21 MNX Iron Butterfly
07/20 MNX Iron Butterfly
07/17 MNX Iron Butterfly
07/16 MNX Iron Butterfly *New*

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Trade Monitor day-by-day

The spreadsheet you see for every trade I take is nothing fancy, I simply create a volatility cone when I start the trade, and on a daily basis I copy and paste key values I want to track on a daily basis for my trades.

For example, let's say I'm starting another MNX Iron Butterfly. As soon as I enter the trade in my tracking spreadsheet, I calculate and plot a volatility cone, then I start to track the closing value for MNX (close line in the cone), as well as the P&L for the trade, the change in volatility, and how many standard deviations we moved every day.

This information is then copied and pasted on a daily basis into a series of columns I keep for every trade. Once you have the trade's history, it becomes an easy process to plot those values in a chart. Those values is what you see in my trade log.

I hope this helps.
Gustavo

Understanding the Volatility Cone

One of the tools I learned to appreciate and use while studying Dan Sheridan's course is the volatility cone. A few traders use this tool, and I think that Dan Harvey was the first mentor to talk about it in one of his sessions. I got hooked.

Let me put it in simple terms: The volatility cone displays what you are "accepting" as the reality when you sell options. It simply means that, given the current volatility levels, the underlying will be in a certain range for a certain number of days.

The cone is nothing more than plotting those price levels day-by-day for the duration of the trade. The way I use the cone is to understand where the underlying is in relationship to where it was (and where market makers were expecting it to be in the future) when I first started the trade. If we start moving beyond the 1 or 1.5 st. deviation curve, it is going outside of the parameters I assumed to be "true" when I sold those contracts, and therefore, my initial assumption is no longer valid and likely to be challenged.

Let's say you sell an Iron Condor, using the original cone as your determination, you sold the CALLs and PUTs from within 1 st. deviation till expiration. If after you sell those contracts, the underlying starts to move beyond the cone, there is a greater chance that it can move beyond your short strikes by expiration. Therefore, your condor will be in a tough spot and likely to be losing money or needing some sort of adjusting.

How to calculate: I start by gathering the "implied volatility" number from TOS for the stock/etf/index the day I enter the trade, then I calculate 1 or 1.5 standar deviation for 1 day, 2 days, 3 days, 4 days, etc.. Once you have this calculated you can then plot those values in a chart and they should look like the cones you see in the blog.

Hope this helps.

Gustavo