Sorry to be off topic a bit. But the only way I learn is by putting
money on the line, making mistakes and not doing THAT mistake again. Got
caught in a squeeze, extricated myself with considerable difficulty.
Licking my wounds right now.
A few days ago when you or somebody else said
"Waiting for expiration is so retail" is absolutely right. What
shenanigans they play, I gotta hand it to them. Had a sleepless night 2
days running yesterday & day before wondering if I would be
assigned. I should have taken the 70% of premium.
Chalking this to
Is this why you dabble in RUT only? I was thinking of dabbling in
You are never off topic.
I trade a single underlying for only one reason – a reason that may not be applicable for others. If I get into trouble, if the market is going nuts, I want to have as few decisions to make as possible.
Even if planned advance, three underlying assets may be responding to the market situation differently. I don't want to take too much time to put out fires. I want to be efficient and quick. Thus, one underlying asset.
Yes, it's a bonus that RUT is a European style option that settles in cash. SPY options are American style and settle in shares.
Per your opening paragraph: I want to play Devil's Advocate:
Your plan is not efficient because:
a) How do you determine when a mistake was made? Because you lost money or could have made more money with a different decision? This is a terrible method for deciding if the action taken (or not taken) was a mistake.
Just because exiting at 70% of the maximum profit would have been a good idea this time does not make it a reasonable strategy. I surely hope you agree with that statement. The only thing you learned is this: This time, this one time, exiting at 70% would have worked best.
Now examine 99 similar occurrences, and when you have 100 examples, then you can decide on an exit strategy. That means you must keep a trade journal and record each trade. Keep tabs on what action would have achieved the maximum profit. Keep track of your actual decisions. Eventually you will have a clue about what to do. Act accordingly when trading. Just remember that no valid conclusions can be drawn until there are a significant number of data points. Be ready to modify your methods as you gain experience and have many more trades under your belt.
b) You can draw no valid conclusions from a single data point. Doing so is dangerous. In fact, it's a mistake. If you want to avoid a mistake, here is an opportunity to avoid one.
Suppose riding the position to expiration would have worked this time. Does that mean you would feel differently about waiting for expiration to be 'so retail' (nice phrase; not mine)?
c) It takes repetition and statistical evidence before you can draw valid conclusions. This is even more true for inexperienced traders who don't have a background of many trades to use as a filter for the decisions being made. Do not decide that something that resulted in a loss is a mistake.
d) You should recognize a mistake when you make one: You took too much risk. You traded too much size. You traded too little size because this situation was special and 10 to 20% more contracts would have been justified. You got too greedy. You were far too cautious for no good reason. You ignored your trade plan for no valid reason. You felt uncomfortable with position risk (more sleepless nights?) and did nothing to alleviate the risk. Those are mistakes. Even if the result is a huge profit, these are mistakes.
e) If you sell premium, you will get caught in squeezes. Your job, as a risk manager, is to anticipate the squeeze and alleviate some of that pain in advance. You may decide to reduce the effects of a squeeze by reducing position size. You may exit the trade and eliminate the risk of a squeeze. It locks in a loss? Who cares? You know some trades will lose money. Minimizing those losses is NOT a mistake.
Your job is not to hold on to a bad trade stubbornly, hoping for the best. Your job is manage risk well. Succeed at that, and most of your 'mistakes' will disappear.
You will take losses. The market will move in a manner that does not suit your hopes or expectations. These are not mistakes unless you missed the obvious and refused to take appropriate action.
Sometimes, the market will behave in a manner that suits your positions. That makes you neither a good trader nor a genius.
Recognize the facts: You will win some and lose some. If you manage risk well, you are doing your job. If you lose money despite taking good, appropriate action, you did the right thing and it is not a mistake.
One more point: Unless you are short OEX options, why are you afraid of being assigned an exercise notice? Early assignment reduces risk and is often a gift. If that assignment would result in a margin call that you cannot meet, then your positions are far too large. Assignment is nothing to fear.
Coming in the July 2010, to be published next Monday: July 19, 2010
Interview with Charles Cottle
Book review: Volatility Trading by Euan Sinclair
Bill Luby discusses the suggestion that volatile markets are coming
Guest article by Tyler Craig – Adjustment Trading
New Contest. Win a year's subscription to Barron's