12/30 Daily Summary

Nothing major happened in the markets Today, we're still rotating around the top levels on most major indexes. My best guess is that everyone is waitting for next week in order to make a decision once the bulk of the market participants come back from the Holidays.

I've decided to close the RUT position Today after studying different alternatives with a decision making tool. I didn't touch the MNX position, but will continue to roll the short 180 calls if we keep pushing up Tomorrow, even if on low volume I simply can't take on too much risk going into next week.

Position's Details and Price Action chart
12/30 MNX Iron Butterfly
12/30 RUT Iron Condor

12/30 RUT Iron Condor

I closed down the position Today, we're hugging the 630 level and I'm not confortable with what can happen next week once volume comes back into the market.

Before closing the trade I ran a few different scenarios for possible adjusting to stay longer, after evaluating on an objective decision making tree, I decided to simply close down the trade. This decision making excercise was great.

12/30 MNX Iron Butterfly

Not much changed Today, I left the position alone, MNX moved down then made its way back up. I have contingent orders in place to roll additional 180 calls if we make new highs Tomorrow.

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

12/29 Daily Summary

Not much happened in the market, we're rotating at the top, and a pull back might just happen. In fact, as I write this, futures are pulling back, but then again, the real action happens when the market opens, so we'll have to see what comes up then.

I have rolled one of my short 180 calls on the MNX Iron Butterfly, this cut my delta that was starting to get out of control. I might keep on rolling them this week if we don't show signs of a pull back. I might roll even if we pull back, as the deltas on these contracts are getting out of hand.

The 5-Day volatility chart is still strong on MNX, but weakening on RUT. No pull back in sight just yet.

Position's Details and Price Action chart
12/29 RUT Iron Condor
12/29 MNX Iron Butterfly

12/29 RUT Iron Condor

The trade continues hedged. I have exited the exact same copy I have of this position in my IRA accounts. I figure they are in a stop point, but in my cash account I'm testing my patience. The hedging bought me several days to think the trade over, but now it is starting to deteriorate, so if we don't pull back I will shut it down and get ready for next month.

12/29 MNX Iron Butterfly

I did 1 vertical roll to keep my deltas under control on the trade. I have to say, I'm keeping the delta hogs (short 180 Calls) for a bit longer than I want to. My feeling is that this upside swing needs a pull back and the lack of volume indicates that the heavy market players are all on vacation this week, so who knows what they might want to do once they come back Monday of next week..

Bottom line, now matter how hard you think about a decision, there is always a possible outcome that will prove you wrong. In my case, I've been trigger happy in the past, am trying to keep it controlled this time around. It may come back to haunt me.. we'll just have to see it.