May I ask you to have a look at this "real" life (paper trading portfolio) situation?
In late September (SPY @ 114) I bought the following IC (40 lots): Dec SPY 124/126 C, Dec SPY 101/99 P @0.51 (no commissions included).
In early November (SPY @119), not feeling very comfortable with the rapid rise in SPY, I decided to roll 124/126 to 127/129 at a cost of 0.24. By doing so, my original premium of $2040 was reduced to $1080 (OK it is not important, I just want to mention it.)
Yesterday, I closed the puts 101/99 at a cost of 0.04.
So, I am left with #40 127/129 C. (max possible gain is now $920). Today (SPY @ 119.8), the greeks for my position are: Delta= -133, Gamma= -51, theta= 17, vega= -78 Delta for Dec 127C is 0.06 (very low) I feel comfortable looking at the greeks. But, at the same time, I have no idea where the market is going. SPY has only to rise by 6% (quite probable), in the next 30 days, to reach my short call (127).
If I want to close my position it will cost 0.07. Then, my final profit becomes $640. This is not what I had in mind when I planned the trade. My objective is to close the position once I can achieve 70-80% of the original premium (approx $1450). So, here I am, feeling comfortable on one hand but not feeling "safe" enough on the other hand.
What shall I do? OK, I do not pay attention to profit and I decide to close the position (I think I will sleep better). I will open a new one expiring in February. Obviously, I do not expect you to tell me if I made the right decision or not. But maybe you can comment on my thinking process. My feeling is that I did not manage this trade in the best possible way.
I'm very disappointed in how disappointed you are in what you have done with your position. I believe you are dissatisfied because you did not achieve the maximum possible result. You faced some trouble, chose to spend cash to temporarily get out of trouble, and you earned a substantial profit.
Why are you disappointed? Your trading goal should be to make good risk management decisions at the time that such decisions must be made. That represents the long-term path to success.
In my opinion, you handled this very well. I have minor quibbles, but they are minor:
a) You must look at commissions. I think that 40 lots of SPY is too many to trade. Why not trade 4 SPX spreads and cut trading expenses?
You traded 160 contracts to open; 160 more to roll, 80 more to close and will trade an additional 80 to exit the calls. How much profit disappears through costs? You cannot ignore commissions, especially when trading 480 contracts. With some brokers, that would eat up all the profits – and then some.
Try SPX next time. Do a 4-lot, 20-point, SPX spread and see how it feels to manage that position. That's one purpose of paper trading. It allows you to experiment.
b) You were uncomfortable and reduced risk. That's good. You paid a lot for this call roll – approximately half the original cash – but if that's what it takes to get comfortable, then that's what it takes. Holding positions that you want to own comes first. Nothing wrong with this trade.
Minor quibble: paying 24 cents is a big cost. But don't let that prevent you from doing the same thing next time. The real decision for you was: roll or exit (or reduce size). You chose the roll. Very reasonable.
Your short options were still 4% OTM, and for most traders that is too early for rolling. However, you are not most traders. You are Dimitris and must satisfy his comfort zone. It's ok to be conservative. However, there is a limit. If you adjust every time the underlying moves 2%, then this is not a good strategy for you. However, another purpose of paper trading is to get a feel for making adjustments and when to make them.
I hope you are keeping a journal of your trades – and more importantly – of your thoughts when you make those trades. Don't forget to include your thoughts when you decide NOT to make an adjustment.
Once you pay this much for the roll, there is no possibility of meeting your original profit objective. You must come to recognize that this is ok. Your primary goal is not to incur a large loss. Your secondary goal is to earn a profit. Your tertiary goal is to meet your profit objectives – over the longer term.
You are overlooking one substantial point. Your profit objective, to be kind, is unrealistic. Surely you do not anticipate earning that profit on a consistent basis. Your margin requirement was $200 per spread. And if your broker allows, it was only $149 because you can use the cash from the trade to meet part of that requirement.
If you had been able to earn a 70% profit, that would have been $35 per spread (70% of $51). That's a profit of more than 23% (35/151) on your investment in less than two months. Please tell me that this is not your normal expectation. 23% for a year is a good result, one that is met by very few investors and traders. To anticipate that result every couple of months, and to be disappointed when you don't earn that much – is… Well, I have no kind words for that.
As it is, a profit of $640 represents more than a 10% profit, or better than 5% per month. How can you not be happy with that result? Yes, the true gain is much less due to commissions.
When markets are dull, you may earn something near that 20% return for some of your trades. But you will not earn that consistently. No way. When the market makes an unfavorable move and your comfort zone (and prudence) dictate making a change to the original position, there is not going to be enough credit remaining to meet your current lofty goals. And believe it or not, you are going to lose money some months. If you get overconfident, you may lose a bundle. And quickly.
c) You covered an inexpensive OTM spread. That's also good. You paid the equivalent of $0.20 for a 10-point spread. For December options, I see nothing wrong with that.
What to do now? That's easy. Do you want to hold this trade when you can exit at 7 cents? If yes, hold it and the next decision is just how much to bid. Then enter the bid. If you do not want to trade front month options, then look to exit now, on weakness, or on time passage. Perhaps Monday.
One more quibble: If the delta is 6, then it is not 'quite probable' that SPY will rise 6%. It is unlikely, based on statistical analysis. If your gut tells you differently, then go buy that call spread.
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