Tag Archives | expiration

Trading Mistakes: Did You Make One? How can You Tell?


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




Hey Amit,

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

Lot's more

Read full story · Comments are closed

Explosive Gamma

Addendum:  For anyone who doubts that near-term gamma can be explosive, today's trading ought to take care of those doubts.  DJIA was down 1,000 for a brief moment that rallied more than 700 points.

Previously posted at The Options Zone


I often mention that owning a position with short near-term options is extra risky (with a correspondingly high reward potential) because negative gamma can wreak havoc on the position.   A recent email reaffirmed the notion that it's not enough to mention the problem with negative gamma.  It's necessary to offer more details, allowing everyone to understand the situation.



In your book you make reference to
weekly options and I know people who are trading spreads and condors on those
options. As a beginner, I can see the advantage of a very short time exposure
to market change, but I can also see the disadvantage in the speed with which
you may have to carry out any position management.

What are you thoughts? Would you
recommend them?
example, what would you think about the SPX an SPX call iron condor: 

  • Shorts are each 50 points OTM
  • Cash credit =  allows for a 2% return ($50)
  • Expiration is
    of this week (today is Monday)
  • Very high probability of success?

I was very disappointed at how difficult is is to trade those weekly options.  Too little volume; bid ask spreads are too wide. I do NOT recommend trading iron condors or credit spreads with weeklies.

If you want a lot of bang for the buck; if you want high
risk and high reward position; then this fits the bill.  But it's too risky for my taste.

When little time
remains in the lifetime of an option, time decay is obviously very rapid. 
The problem is that you cannot collect much premium for selling these call and/or put spreads, unless they are not
far OTM.  When those options threaten to move ITM, gamma explodes and
losses mount quickly (more on explosive gamma below).  It's truly high risk/high reward.

If you believe you can manage those positions well, and if willing to take the
risk, they are viable to trade.  I want neither that risk nor reward.
But this is truly a personal decision. 

If you are new to iron condor trading, as you are, this is not a good situation to get your training.  I don't even like them in a paper trading account. You want to experience calmer conditions when learning to develop good risk management techniques.

Your example.  Margin is $2,500, so a 2% return is $50.
I am not willing to collect $50 when risking up to $2,450.  To do that, I want
very, very high probability of success.  More than 99%.  You may feel
differently, and that's fine.  But trying to collect these small premiums
month after month (or week after week) looks good and feels safe.  But it's

Ask yourself at what point would you cover out of fear or necessity.  How much would you lose in that scenario?  How often
would that happen? Then, how much profit remains for you?
Too dangerous in my book.  You don't win as often as you think –
because you will take losses to exit at least part of the time.

I did not look at the specific option deltas in your example.  Are you aware that adding the delta
of the short options gives you a good estimate of the chances that either
will finish in the money?  Total delta of 2 means 2% of the time. And if you are getting 50:1 odds when the true odds are 50:1, there's no advantage.


Expiration is NOT Thursday.  This is a common misconception.  Expiration is Saturday, but what concerns you is Friday morning.  That's when the settlement price is determined for European options.  Please know how that price is calculated.  Novices frequently scream in anguish when they discover the rules.


NM continued:   I am not interested in high risk/high reward trades that lead to management under pressure. I will continue pursuing
a method based on monthly condors.

Would you make the same comments about the dangers of holding a one
month iron condor near to or up to expiration?  I don’t know the
reason for the explosion in gamma that you mentioned, so I don’t know if
it would apply to monthlies, but I can see that it should apply.

Is this the
reason that you tend to trade longer term condors and not hold them until near
the end of the expiration month?



YES, that's the reason.  Current gamma – your position as it exists at the
time you look at it – is very dependent on the amount of time that
remains before expiration arrives.  It has nothing to do with how much time remained (prior to
expiration) when you opened the trade.  It's all about 'today.'

Correct.  It does apply to monthlies.

Longer-term options have less gamma.  Quick explanation:

Look at an
option with two months of lifetime remaining.  Assume it moves into the money.  Because there
is so much time remaining, it takes a huge move to get that delta up to
80 or 90. A 100 delta is seldom seen.  Reason: Because there is lots of time
for the market to turn around, and the probability that the option will be in the
money (that's one definition of delta) at expiration time is less – when compared with an
option with two days to go. 

Once that latter option is ITM, the chances
it will stay there are much higher – because there's less time for it to
retreat.  So delta explodes towards 100 quickly.  Thus, the option
moves point for point with the stock – and that means big losses. 

the other end, an option that seems to be safely OTM and has a delta near 5 can quickly move to 50 delta, as the
option becomes ATM.  With longer-term options, the delta
change (and gamma is the rate at which delta changes) is far less

The advantage to being short that explosive gamma is the rapid time decay.  In my opinion, that decay is not fast enough to justify the risk.  Many traders are very willing to take that risk for the reward.



Read full story · Comments are closed