Objective Decision-Making

I've been thinking with my buttons regarding the decision-making process of adjusting a condor. If you've been following this blog, you know I adjusted the OIH Low Prob Condor this week. After I did the adjusting, I kept thinking: now there is risk, but a lot LESS rewards on the trade.

Here is why: Once I cut 1x CALL spread, it took away a lot of my profits, and now I'm trading for an expected pay-off of $75. This is 6% ROI, for a risk of 18%... it is a 3:1 risk-reward ratio and I don't like it. So, what should have been the process here?

Being the Project Manager that I used to be, I went to an old tool I used to apply for decision-making: a decision-making tree. You can find more information at http://en.wikipedia.org/wiki/Decision_Trees, or simply go to a bookstore and grap a project management for dummies book, it should have a simple decision-tree there. If not, get another book :) Here is what a decision-tree would look like for this scenario:

The tree would have told me "do nothing" by a margin of 10 to 1.

Let me explain how the tree works:

1) The first 2 nodes are the decisions you are considering

2) For each decision you make, there are events and probabilities and pay-off associated with them. In the example above, if I close the CAL spread, I'm left with 3 possible events: OIH goes beyond 95, Stays between the strikes, or goes bellow 58. Then let's look at each event and its respective probability and pay-off:

a) There is 15% probability that OIH will go beyond 90, causing a loss of -284

b) There is 82% probability that OIH will stay between the short-stikes, causing a profit of $75

c) There is 3% probability that OIH will go bellow 60, causing a loss of -264

Repeat the process for the "Do Nothing" decision, and update the values, because the probabilities are the same regardless of what you do.

Finally, the tree simply weights the risks/rewards and probabilities and spits out the path that is most likely to give you the best rewards. In this case, I used all probabilities and values based on Friday before expiration.

TOS is great because it calculates the probabilities of pricing expiring beyond these limits and where your profit-loss would be. I'm consdering purchasing the decision-tree add-on for excell to help me on further exploration. What do you think? Have you done something like that for trading? I'm waitting for comments/feedback.

20/03 All Trades - Quick Daily Update

For those who, like me, made through one more week of trading under wild market conditions, congrats! We`re one week older and wiser.

As far as I can tell, all my trades survived this week, they're still in the table. On the not-so bright side, they were all adjusted one way or the other. Now we`ll need som time to allow theta to take care of the cost of adjusting.

One of the realizations I had this week is the fact that adjusting condors may not be the best answer after all.. What if you simply allowed the trade to work (or not), and placed your stops at 1.5x times your original cashflow? I`ll be looking into that over the weekend. Kudos to TrackingCR for noticing that too and making a comment on the risk profile for the RUT HP.

Here is a collection of risk profiles. I`ll post again later on the weekend with a detail plan of action for Monday for each Trade.

RUT Condor
XLE Double-Diagonal

OIH Condor

GLD Calendar

19/03 RUT LP - Santucci way

I've added a paper trade to follow Mark Santucci's method. Will start blogging it next week, am just too tired Today... Alergy season

19/03 GLD Calendar

Not much to update on, got a bit of Theta Today.

Probabilities of Success:
91.4% probability of being adjustment free Tomorrow

Contingent orders
Close if GLD at or above 97.5
Close if GLD at or bellow 86

19/03 OIH Condor

I had contingent orders in place for being down by 10%. Today OIH surged up and volatility didn't go down, the result was a discrepancy between actual prices and my contingent ordes. I was watching the market and noticed that the trade was down 10% and still $1 away from my order, so I because I already knew what to do (cut 1 CALL spread), I went ahead and did it.

For the future, estimating P&L is very tricky, you never know what the implied volatility will do, you can only guess.. Tomorrow I'll be looking at changing my condors to adjust based on the delta of the short strikes, at least I know the delta will self-adjust based on the volatility.

Probabilities of success:
99% probability of being adjustment free Tomorrow
68.46% implied probability of expiring profitable
85% historical probability of being in the money by Friday before expiration week

Contingent orders:
1) No CALL-side contingent
2) Close 1x PUT spread if at or bellow 62.5

19/03 XLE Double Diagonal

Hit adjustment point on XLE Today. Gapped up at the opening, my contingent orders are always scheduled to trigger at 7:00 and so it did. It automatically cut the deltas down and I added the PUT diagonal later on the day (around 11:00 PST).

Probabilities of Success:
70% probability of adjustment free Tomorrow
43.8% implied probability of expiring profitable
65% historical probability of being profitable Friday before expiration

Contingent orders:
XLE at or above 46.25:
1) Buy 2x 44/48 CALL verticals
XLE at or bellow 40.35:
1) Buy 2x 41/38 PUT verticals

19/03 RUT Condor

Lived to trade another day. RUT did not hit the stop loss, as I said Yesterday, 33% chance is better than 0%. Still in the trade, still managing it.

Probability of Success:
61% probability of adjustment free Tomorrow
69% implied probability of expiring profitable
72% historical probability of expiring profitable

Contingent orders
:- Buy CALL spreads for .10c (GTC order)
- Buy PUT spreads for .10c (GTC order)
- Stop Loss @ or bellow 295, or @ or above 422.5 (Day Order)**
** Increase Imp.Vol by +5% to estimate down-side, Decrease Imp.vol by -5% to estimate up-side