4 Responses to Managing Risk: How Much Attention to Pay to Account Value

  1. Jared 01/21/2010 at 8:47 PM #

    Thank you Mark
    The $13,000 is the required capital that my broker takes out of my account to hold the position, and the $300 p/l is based on the mid point at the close. I guess that being up $300 is not that big of a deal on a $13,000 position. I just felt as though I should have been able to protect that profit a little bit better.
    Jared

  2. Mark Wolfinger 01/21/2010 at 11:43 PM #

    Margin requirement.
    There is nothing you can do to protect a tiny profit.
    In my opinion, you never had the profit. You cannot exit a trade at the mid-point. You have to take less. Just as when you initiate the trade.
    There is nothing you can do when one option is bid a bit higher or offered a bit lower due to the presence of a 2-lot from a public customer. Those small orders change the mid-point and can throw off the ‘marks.’
    Bottom line: To ‘protect that profit a little bit better’ you have to do something. That means trading. OK. Trading what? What would you buy and/or sell that would ‘lock-in’ those profits and not add to risk? And what would it cost you to make those trades? And how would you overcome the wide bid/ask spreads so you can make any money?
    You must understand this is an impossibility.
    Your problem is risk. When one or more of the Greeks gets out of line – according to your comfort zone, then it’s time to take defensive action.
    If that never occurs and the position remains within your zone as time passes, then you win. You pick a time to exit with your profit. You cannot be concerned with marks on a daily basis.

  3. Jared 01/22/2010 at 9:37 AM #

    Thanks I think that I understand. Basically (and this is simplified), monitor the Greeks, keep them within reason. On the P/L Graph make sure that you are not falling down the hill(on the today p/l line), and make sure I stay under the umbrella of the P/L Expiration line.
    Jared

  4. Mark Wolfinger 01/22/2010 at 9:44 AM #

    There’s more than one way to manage risk, but there are two important factors than cannot be specified in detail:
    a) Stay withing your comfort zone
    b) I you are not certain where the boundaries of that zone lie, then know when you will take defensive action.