Tag Archives | winning trade

Doesn’t making money mean it was a good trade?

Some days it's difficult to find a blog topic.  When that happens I spend some time reading other blogs, looking for ideas.  One, by the Stock Bandit, Jeff White, drew my immediate attention.  I've been saying the same thing for a long time, and it's always reassuring to see someone else with the same opinion.

In a post titled: Succeed by Not Failing, Jeff offers his opinion on a topic that many consider to be controversial:

"Too many traders think a winning trade is a good trade, and a losing trade is a bad trade…a failure.  I disagree."

The result of a trade is either a profit or a loss, but not a success or a failure.  Good trades can end up being losses, and poor trades can sometimes result in a profit. 

John gives an example and provides three common ways that traders fail.  It's worth reading.


If this is a topic that has not bothered you, consider the situation of someone learning to trade.  He/she dutifully opens a paper-trading account, chooses a strategy, but is not confident when choosing which options to trade. 

  • The covered call writer may be torn between selling ITM, ATM, or OTM options.  Then there's the problem of which expiration month to choose
  • The  butterfly trader may not know how far from the center strike to place the wings
  • The iron condor trader is told to find a comfort zone and begin from there

Comfort zone.  That sounds good.  We can tell when a position makes us nervous or whether we are entering into a trade with more confidence than usual.  But how do we do that?  It's based on experience.  We know what works and what doesn't work for us.  It's far better to have written trade records than to rely on what may be a faulty (biased) memory, but we have a feel for what to trade.

What is our beginner to do?  When initiating an iron condor position, the beginner has no idea what makes him/her comfortable.  With no experience, how far OTM is 'safe'?  Or how much premium does he/she have to collect?  Certainly there's no clue about an appropriate position size, and trading 1-lots is often the default choice.  But there's no 'comfort' there.  It's all uncertain territory.

The Winning Trade

 If this new trader is going to learn from making practice trades, There must be an understanding of how the trade was handled. 

Let's say our trader opens an iron condor position and the market moves.  The short put option goes well into the money and even the long put is ITM.  Doing nothing – out of fear and inexperience, our trader sees the market reverse, the iron condor expires worthless and here is a winning trade.  Not only a winner, but a maximum winner.

If the conclusion is drawn that this trade 'fits' into the trader's comfort zone and that the best way to handle iron condor trades is to wait for expiry, then this trader is already in trouble. 

This is a simple example of why it takes many trades before viable conclusions can be reached and why the result does not describe whether the trade was 'good.'

On the other hand, if the trader had felt queasy when the underlying declined and covered the entire position when the puts were 2% OTM (later than many would cover), he/she would have a losing trade and may conclude that this was a bad trade and that it was handled poorly.  Especially if the trader pays attention to what would have happened (I suggest not doing that).

In reality, it was the same trade and cannot be good part of the time and a poor choice at others.  Either it was suitable for this trader, done in the right size, had a reasonable risk/reward ratio – or it wasn't.  In this extreme example, it's risk management that made all the difference.  And to make matters worse as a learning example, it was poor risk management that led to the profitable trade.

Thus, profit or loss is not the deciding factor.  It's not to be ignored, but there are other things to consider.

Please use judgment when evaluating your initial positions.  Do not allow the final monetary result to enter into the decision-making process. Take your time.  Collect data and learn to read your own body.  Discover trades that make you comfortable and those which don't. Most traders sense when there is too much risk.  That could mean 'too likely to lose money' or 'too much money can be lost.'

That trader must also try to judge how well risk was managed because that's going to be an important factor in the trader's future profitability.  When first beginning to use options in a virtual account, it pays to take notes and try to gain something from every experience.  In reality, it's not easy to understand just what was done correctly (with the odds of success on your side) and where luck (good or bad) played a role.  However, the trader does accumulate knowledge as time passes. As he/she understand the trades better, the opportunity to ask questions accelerates the learning process.

Bottom line:  There's data to collect, experience to gain, and time before a new trader can know him/herself well enough to place money at risk.


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Exiting a Winning Trade


Thanks so much for your site and your book. Both have been invaluable
to me as I've learned IC trading over the past few months.

My question is: Can offer any guidance on when to
close a profitable position. I'm getting familiar with my comfort zone
and when to get out when my shorts are being threatened, but I'm not
quite sure when to exit a position when things are going well.

I tend to
be too quick on the trigger to exit a good position because I want to
lock in my profit.  I think I'm missing the really valuable time
decay from weeks 6 to 3 ('till expiration). (I am not comfortable holding
any closer to expiration than about 3 weeks)

As an example, I have an SPX IC open for Oct 1000/1010 puts 1180/1190
calls. I opened it 8/18 for a credit of 3.20. Both sides are still open
and it's current mid-price is 1.65. So I could close now for a
profit of 1.55 (or a bit less depending on where I can get filled).

However, I'm 72 points (6%) from the short call and nearly 100 points
(10%) from the short put, so I'm still well within my comfort zone. How
long would you let a trade like this ride.



Hey Kyle,

Thanks for the kind words.

We have a different way of looking at things.  In my opinion:

1) It does not matter when you made the trade
2) It does not matter how much you collected when making the trade
3) It does not matter how much profit you have now

Yes, I know that it's easy to disagree.  And you are with the majority who believe profit is the crucial number.  My recommendation is to try to join the minority.  There is no doubt in my mind that paying attention to original position cost will eventually cost you dearly (because it guides you to poor decision making)

What matters is that you own this specific iron condor today, and the price is near $1.65.  Are you comfortable holding this position TODAY at this price?  Does the current risk and potential reward (going forward) still fit within your comfort zone?  Would you consider opening a new trade at this price TODAY?

If your answer to any of these questions is 'yes', sit tight.  Ask yourself the same question every day until the answer is 'no.'  That's the time to exit.  How strongly you feel about that 'no' tells you how aggressive to be when exiting – i.e. how much to bid.

As the months pass, and you do this frequently, you get a good sense of how frequently to ask that question, and at approximately what price (assuming you have the luxury of waiting) you eventually decide to close.  NOTE:  Different market conditions (more or less volatile) will alter your plans.  But when you have a plan, you have a big head start on solving this dilemma.

Also be ready to close just one side when it reaches a certain price before a certain date.  For me that's 15 to 20 cents for the call side or the put side (of a 10-point RUT iron condor).  I'm very eager to pay that with 4 weeks to go, but still willing to pay that 15 cents – even with less than 2 weeks to go.  But, I'm conservative on this point.  People who have not been hurt badly by allowing cheap options to remain open when it costs so little to cover – seldom understand.

When you make the trade, try to make a trade plan that tells you when to exit. Write down how much you hope to earn when things go well.  I understand that right now you don't have enough experience to know that price.  But make a guess.  That guess does not have to be written in stone.  You already have a send of timing as to WHEN you plan to exit.

After a bunch of trades, these trade plans will be easier to create.  And they can be flexible.  But it gets you to thinking about exiting.

This is very important.  I've said it recently, but it bears repeating for all new iron condor traders:

The past several months have given iron condor traders ideal trading conditions.  Unless you sold front month options that were not too far out of the money, iron condor traders have had the luxury of opening positions and exiting when they want to exit. 

The one and only reason that you feel you are 'missing valuable time decay' is because you have not owned an iron condor position when the markets were volatile.  Holding would have been the winning decision in your previous trades. THAT DOES NOT MEAN THAT HOLDING WILL BE THE WINNING DECISION WITH CURRENT OR FUTURE TRADES.

Are you aware that at the most volatile periods during the 2008/2009 debacle, the markets were so volatile that they were averaging a 5% move every other day? How would you feel if SPX moved 50+ points every other day?  Would you feel that holding longer was still easy money?

We both understand that holding offers more time decay and more risk.  We know that exiting early feels wrong when the market just sits there and does nothing.  But, if you plan to open a Nov or Dec position after exiting, your new position will earn a profit when the market does nothing.  It's truly a matter of which position you want to hold and which gives you more comfort.  If you seek maximum profit from every trade, you will make extra money for awhile.  But at some point, you will discover the wisdom of not being greedy. But, that $1.65 still feels too high to pay right now.

Here's a guarantee:  As I noted above, the past several months have been almost perfect for iron condor traders.  However much you are making now – it will not continue.  You will earn less, or even lose money during some months.  i don't know when market conditions will change.

It's your results that make you feel that you are exiting far too early.  When you have seen more active and volatile markets, you will look at this situation differently.  Experience comes with trading.  The fact that you do want to get out at some point prior to expiry tells me that you understand how risk works – at least to some degree.

Back to the problem:  For my comfort, the current price is too much to pay.  I'd want to pay less.  I don't know how much less.  It's a day to day, or week to week decision. One thing that may help you decide:  If a new position looks so temping that you want to own it NOW, that could be a reason for exiting the current trade and opening the new [assuming you cannot hold both at the same time].



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Success Breeds Failure. An Unexpected Result?

One of my interests is 'psychology of trading.'  It's a fascinating topic and understanding the basics (if there is such a thing) can truly help a trader perform better.  The difficulty with that is recognizing that any of these principles applies to you.  It's so easy to dismiss studies as being unrealistic.  If not unrealistic, then at least the average trader has many reasons why the study does not apply to him/her.

We all want to make more money when trading, but many times traders inadvertently sabotage themselves by making decisions that they sense are not in their best interests.  It's not deliberate.  There's no attempt to prove to anyone that you can do it better than others. 

It's often the result of being uninformed about the myriads of data that explains why some trading decisions are less likely to be successful than others.

One simple example is the size of one's trading account.  Many rookies put together a very small stake ($2,000 or less) and begin to trade.  The chances for success are just dismal.  As yesterday's post of the risk of ruin indicates, the less money you have to trade, the greater the chances of losing your entire trading account.  It's a statistical truth.  But, it's also ignored.


Recently I read a very interesting research study (actually a blog post that discussed that study).  It concerned why traders alter their behavior – depending on whether the most recent trade was a winner or loser.  It would never occur to me to alter trade size, and thus risk, on anything as flimsy as that.  However, when the sample being studied includes a large number of traders and a large number of trades, patterns emerge.

The blog was by the CXO Advisory Group. Much of what follows comes from their post,  The original paper is no longer available online. .

The 6-month study (2006) covered more than 1.3 million Indian investors and 111 million transactions worth $85 billion. The details are available in the CXO post and the paper, but the interesting points to me are: 

  • Investors lost $2.3 billion
  • Investors with positive past trades – trade more often
  • Trading
    volume is 7.7% higher for traders with recent gains than for those with losses
  • The probability of increased trading volume is 1.7%
    higher for an individual with recent gains
  • The sign (+ or -) of recent outcomes explains 89%  of the variation in
    subsequent trading frequency
  • On average, profitability of current trades is almost 60% lower for
    traders with recent gains rather than losses.
  • The more successful individual investors appear
    to be those less influenced by the signs of recent trades.

Bottom line: The sign (much more than size) of recent trades influences future trading behavior
of individual investors. This influence hurts overall

This is the typical situation that I find so interesting.  Something minor, such as a winning trade, influences some traders to make the next trade larger.  The real question is why the ensuing trade loses so much more often.

It may be the result of being anxious to trade again, resulting in a poor choice of trades.  It may be that overconfidence ruins risk management.  There's no way to discover the answer.  The takeaway from this discussion is that mindsets can be altered by seemingly minor events.  It's important to pay careful attention to your trading plan (if you have one) and make every effort to avoid allowing emotions to affect your decisions.


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April 13, 2010 5PM ET

Mark D Wolfinger

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Equivalent Positions: Do You Know Your
True Position?
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