"All courses of action are risky, so prudence is not in avoiding danger (it's impossible), but calculating risk and acting decisively. Make mistakes of ambition and not mistakes of sloth. Develop the strength to do bold things, not the strength to suffer." -- Niccolo Machiavelli, The Prince
These are wonderful thoughts to hold in your mind if you think of trading as being a very risky proposition. Just about any aspect of our lives have risks involved, so is option trading risky? Of course it is, especially if you're a novice and don't quite know what can hit you. Just like driving is risky if you never drove before. The key is in calculating your risk, and acting upon it.
Start small, start with a paper account, but above all, START. It is far riskier to live your life wondering "what if"... Worse yet, to rely on someone else to take care of you money, your investments, your future. As we move out of 2009 and start 2010, decide what you'll pursue, how much you know and need to learn, calculate your risks, and go for it.
This is how I navigated the past year, since July 2008 the market started becoming very much risky for non-directional traders. I had decided I would pursue this style of trading and once committed, I couldn't just walk away and wait for better times. My decision was to scale back in my position sizing, and trade, test and learn the various strategies, see how they'd work out, see how they'd could be shredded to pieces if I was to trade them without a stop, learn, adapt, learn some more, but keep walking on the path.
Even though I ended up negative in 2009, I was down by less than 1.5% in my entire portfolio. Should I have kept on trading the same way I used to back when I had just started trading options (back when I knew close to nothing about options), I'm 100% sure I would have been wiped out at least a couple of times between July 08 and December 09. I learned to trade non-directional options strategies by adjusting the greeks and using risk management. I discovered what strategies I'm more confortable with, and I'm sure that I can keep on this path in 2010.
So, this is something I want to leave behind as we turn the page for the year. Manage and calculate your risks, and act upon it.
Thursday, December 31, 2009
12/30 Daily Summary
Today's price action happened in the last 30 minutes of the year. There was a big sell off. I was updating one of my tools and thought I had made a mistake when it showed the major indexes had dropped by more then 1 st. deviation.. My first automatic thought was: "oh, did I mess up my formulas??" Then I checked the charts and saw what happened :)
Well, no changes were made on any positions, and I'm glad I didn't jump the gun on rolling the 180 calls on the MNX.
Position's Details and Price Action chart:
12/31 MNX Iron Butterfly
Well, no changes were made on any positions, and I'm glad I didn't jump the gun on rolling the 180 calls on the MNX.
Position's Details and Price Action chart:
12/31 MNX Iron Butterfly
12/31 MNX Iron Butterfly
MNX rolled back down in the last 30 minutes of trading Today. I am glad I still have a bunch of the 185 calls, if I had rolled all of them up, I'd be finding myself worried about the down-side becoming a problem sooner than later. If we keep rolling down, my job will be to sell back the long FEB calls and wait for MNX to find footing under my tent.. If we push higher, then I'll just stick to the original plan: roll the 180 calls and stay in the game.
Wednesday, December 30, 2009
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
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.
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
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
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