Adjustment Commentary

Buyer's remorse?  Depressed over making a trade that turned into a loser?  Not at all.

It's true that looking back, I made an unnecessary adjustment.  I closed a position that would have looked much, much better only 24 hours later.

It
may be difficult to believe, but I am not at all disappointed.  Sure,
the opportunity to earn a decent profit from that position has been
lost, but I'm pleased with my risk manager's ability to recognize that

  • The position reached (and exceeded by a couple of dimes) the maximum loss allocated for it when the market moved very quickly.
  • The chances of mounting losses was present.
  • The risk/reward potential for the iron condor became unfavorable.


And once my risk manager recognized those facts, he easily convinced the trader in me to take my loss and close the position.

Monday's
47 point decline in RUT played havoc with the positions of most iron
condor traders.  But because I cleared one risky trade from my
portfolio, I was able to substitute different iron condors with much
greater profit potential – and with significantly less risk.  And the
best part is that I was able to buy those iron condors when IV was very
high – meaning I collected a very nice premium for the new positions.

True,
the profits – if they are eventually collected – will take more time to
harvest, but my portfolio is less risky and that's the important part
of the combined transactions.  Tuesday's rally, and significant
decrease in implied volatility, has already turned those new positions
into great looking trades.

Bottom
line:  I cut risk, made sure nothing terrible happened to me, and
survived the market fiasco.  I even went out of my way to cover some
cheap OTM Nov and Dec call spreads that became available Tuesday
morning with the steep decline in implied volatility levels.  We may not
get a continued rally, but with those call spreads covered, my upside
risk had been slashed. Now there's room to sell more call spreads, if
and when I decide to do so.  I had offers to sell Tuesday afternoon,
but no buyers bit.

112


7 Responses to Adjustment Commentary

  1. slait73 10/01/2008 at 9:44 AM #

    Dear Mark,
    Could you explain something about GAMMA SCALPING?.
    I´ve read it´s a way to complement the IC strategy.
    Regards from Spain.
    A.

  2. NG 10/01/2008 at 10:32 AM #

    Hi Mark
    I learn a lot fron your Blog.
    Please write an article on RUT-DEC play.
    I noiced today the following:
    RUT=666.29
    RUT DEC 660/670 PUT-DEC 790/800 CALL =$12.00
    Please correct me if I have not written IC PLAY correctly.
    That looks very attractive.
    An analysis will be appreciated.
    Thanks
    NG

  3. dave 10/01/2008 at 5:06 PM #

    hi mark,
    I had the same thing on monday. I had a spy condor 131/133 call spread 113/115 put spread. When the market unraveled it moved so fast both strikes were in the money before I knew it. I had the same position in 2 accounts 1 account actually profited more due to me closing the short strike while still long the long strike. However in the other account I took the max loss due to the sharp reveral I was was closing the short strike first and then the long strike as the market was coming back up. I learned 2 things. 1 ) in this volatility it may be better to wait till the market calms to close positions 2) similair to what you said yesterday it is better to scale in or build positions in this environment. We should be adding put spreads after declines and calls spreads after rallies. It is a tough environment to start complete positions in. Thanks for all your insights

  4. Mark 10/01/2008 at 7:51 PM #

    NG,
    1) I agree. Buying a 10-point iron condor position for $12 is very attractive.
    2) But, it’s an impossibility. This spread can never be worth more than $10, and no one will pay anything remotely resembling $10. You can forget about $12.
    3) If your timing is good and you leg into the iron condor by selling the call or put spread first – and later selling the other spread, you may indeed collect a great price. But don’t count on getting more than $10.
    With so much time remaining before Dec expiration (12 weeks), it’s even more difficult to collect anywhere near $10.
    4) The last time you commented, I replied that your data seemed suspect. So, I ask again, from where are you getting your option prices? Are you using the last trade (bad idea) or are you using the mid-point between the bid and ask prices (good idea)?
    5) I’m sure you know this, but the iron condor you suggested is a very bullish play. The put spread is only a few points out of the money while the call spread is more than 120 points OTM.
    6) I think this is a good time for a Dec iron condor because implied volatility is high. Just pick strikes that allow you to be comfortable in this very volatile market.
    Mark

  5. Mark 10/01/2008 at 8:04 PM #

    Dave,
    Sorry for the difficulty you had trading.
    1) I disagree. You cannot afford to wait for the markets to calm down. That many take hours. And, the market can easily move a dozen or more RUT points in much less time than that.
    2) I agree that scaling positions is a less risky methodology. But, when markets are calm, it can mean you miss an opportunity to collect higher premium. I think it’s worth taking that risk for a bit of additional safety.
    3) IMHO, this is what I believe you should have learned from this lesson:
    a) Don’t leg into or out of spreads. Enter your order to close the spread as a LIMIT price. NO market orders. Never. In a wild market environment, you may not get the best price, but that’s a matter of a dime or two. When you take the leg, you can easily make or lose an extra buck or two. Why take that risk?
    Of course, all this depends on how good your broker is in executing spread orders. But taking the leg increases risk considerably.
    4) I also use two different accounts, but try to NEVER have the same spread in each. As you discovered, working two positions at the same time is more difficult than working only a single position.
    5) Selling puts on declines works very well. Not only is the underlying lower, but the ever-increasing IV gives you better prices for your spreads.
    However, the corollary is not true. As the market rises, decreasing IV often means that the call spreads you are trying to sell are bid LESS than they were before the market started rising. Pay attention to the call spread you want to sell. Compare the price before and after the market rises. You may find it’s better to sell the call spread just after selling the put spread – just because the IV is so high. But, bottom line: Trade within your comfort zone, not mine.

  6. Jason Pinto 10/02/2008 at 9:48 PM #

    Mark,
    New to your site and enjoy it very much. It is hard to teach and not preach or condescend and this site manages it well.
    Your comment about selling an option at a profit only to see it become much more profitable the next day is common. I now also can smile when this happens knowing i have put real profit in the bank after the sale and it is only opportunity lost, not money. Pigs get fat, hogs get slaughtered I guess it goes.
    I think the difference between a complete rookie and a novice trader is having had the experience of not selling a big winner only to watch it evaporate to nothing in a short period of time with everything including your initial stake lost. That is a lesson everyone learns.
    I don’t presume to offer advice as I am still only a novice, but I now make sure that I get my money back out of a big winner early on so at worst I am even if the worst happens.
    Thanks again for keeping it real!
    Jason

  7. Mark 10/02/2008 at 10:15 PM #

    Jason,
    Some traders like to let profits run. Unfortunately some let it run forever and the profits go away. I think you found your comfort zone – and that’s going to be a big help in your trading career.
    I wish you continued success.
    Mark