XLE Double Diagonal

Got to the second adjustment point Today. The adjustment was pre-programmed and executed automatically, which is a nice feature on TOS. Now I don’t think there is much more adjustments I’ll do to this trade, looking at the VOL cone, we’re moving over 1.5x st deviation to the up-side, and I have already executed 2 adjustments.

I have set the stop at the up-side b/e level and will shut down the trade if we get there.

03/23 RUT Condor - Trade Closed Analysis

The RUT HP was shut down for -17% loss. I gave the trade some extra room and stuck with 422.50 as my stop loss, it got hit Today.

Before I begin, the main reason to get stopped out Today was the fact I didn’t follow my original plan on this trade. I got emotional about it during the down-run and got knocked out when the market snapped back up. So, bellow is the trade and its adjustments one by one.

1) First let’s look at the original volatility cone on the trade, as you can see, we went down to the 1.5x st. Deviation right in the beginning. At that point I closed the CALL side for .13c, my plan was to stay with the PUT spread until they hit a delta of -25, the insurance was holding the trade under the max loss and 25 delta would have kept me out of trouble evenif we spent some time bellow 1.5x st. deviation on the original volatility cone.

On 03/05 I got emotional about hanging on to the down-side two months in a row and decided it would not happen again. So I went to work cutting PUTs and re-opened 1/2 of the CALL spreads. This in hindsight was the biggest mistake: I didn’t evaluate a new volatility cone when I added and adjusted the trade, look at the new volatility cone after my adjustment, you’ll see the market snapped back up 1.5x st. deviation, this time to the up-side.

3) So, when the market snapped back up, I had the CALL spreads and they knocked me out. Now that I learned this lesson, my decision is to no longer make adjustments on the High-Probs, I’ll discuss it with Dan next week. My plan from now on is to set them and take the spreads at .10c or close the trade if it gets down by 1.5x the cashflow. I tested this and looked at the Volatility Cones for the past 5 years, this should work about 75% of the time.

What did I learn?
1) Trust the probabilities
2) Don't chase the price
3) If and when I adjust any trade, look at the new Volatility CONE before doing so
4) Do not let previous month's loss to take me out of my plan. My original plan for this trade would be working right now

What will I do next?
1) Cut back in size untill I can re-gain my self-confidence
2) Stop trying to adjust HP condors, work with 1.5x the cashflow as the stop and that's it
3) Go over the trade with Dan for his feedback.

03/22 GLD Calendar

GLD is around 94, so far nothing needs to be done.

95% Probability of staying in the trade Tomorrow

Stops:
Close if GLD at or above 97.50 or at or bellow 86

Note: I use contingent orders for stop, only difference is that I set them to trigger at the end of the day 12:30 PST

Bellow is the profile

03/22 OIH Condor - Daily Update

I'm considering re-opening the CALL spread on OIH. The trade as stands has no up-side risk, yet the profit potential is very small. I'll evaluate the possibilities Tomorrow morning with fresh market data to look at.

Probabilities of success:
1) 99.99% of being adjustment free Tomorrow
2) 74% probability of expiring profitable
3) 925 historical probability of staying between b/e strikes by Friday before expiration

Contingent Orders:
Close 1x PUT spread if OIH at or bellow 63.29

03/22 XLE Double Diagonal - Daily Update

Not much to report, price right at the center of risk profile. Just looking out at adjustment levels

Probabilities of Success:
1) 97% of being adjustment free Tomorrow
2) 47% probability of expiring profitable
3) 69% historical prob. of staying between B/E by Friday before expiration

Contingent Orders
1) Buy 2x 41/38 PUT vertical if XLE at or bellow 40.30
2) Buy 2x 44/48 CALL vertical if XLE at or above 46.70

03/22 RUT Condor - Daily Update

RUT eased off from the 420's area. Got really close to my stop loss. The probabilities of success are better now. No change planned, only contingent orders for stops

Probabilities of Success:
1) 94% it will be adjustment-free
2) 75% implied probability of expiring profitable
3) 97% historical probability of staying between B/E untill Friday before expiration week

Contingent orders:
1) Take profit for CALL and PUT spreads @.10c (GTC order)
2) Stop if at or above 422 or at or bellow 295 (Day Order)
Here are the profile, dashboard and historical probability charts

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.