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In this journal, I will document my current account that I trade. This includes Vertical Credit Spreads, Iron Condors and Hedge positions to manage this account. I will provide my beliefs about the markets and my trading strategy. I will also note the wisdom I have attained over the years and the battle scars I have taken on trading credit spreads in these markets listed below. I will also note why I trade these markets and not stocks.
This account and journaling will use the vehicles of the SPY, IWM, SPX, RUT and maybe the NDX. This account is focused on selling premium and benefiting from Theta decay. So I am selling time premium for both Calls and Puts positions. This is a direction less market plan that I will document as I trade.
Why I journal?:
Document my beliefs about the market.
Document the various entries, exits and adjustments I make.
Document any market analysis that I perform.
Document for other traders how to sell premium and why to sell premium.
Provide a list of lessons learned and wisdom.
Hopefully, build a community of seasoned traders with these sets of trading strategies.
Last week was a big sell off week so I was very busy managing my account.
With my account, there are a couple of things I review at a high level each and everyday. One is to determine what is my total portfolio looking like from a risk perspective. On the TOS platform, on the Analyse Tab, I can determine this. This tab consolidates all my positions and shows an expiration line (red line), a current profit loss line (white line), and the current price of an underlying (center verticle line). Prior to having this tool and level of analysis, I was at a disadvantage in my opinion. I am a visual person and having this along with the consolidated greeks I can plan my day.
The analyse tabs takes into consideration the daily futures (pre market) and helps me determine at the market open if I am leaning bullish, bearish or in the middle. Since I am selling time premium, I want to be in the middle as much as possible unless I am biased in a direction.
After looking at the analyse tab, I then look at my Delta of all my positions to determine if I am Delta long or Delta short and how big the Delta is as a total. Why is this important? Well if I am Delta long 1000 it means that an upward price move will net me a thousand dollars and reverse if the price goes down. My goal is not to allow my Deltas to get to out of proportion with my Theta. I do not want a Theta of 200 and the Delta of 1500. The main reason being is that a big move in price can swing my account a lot an offset any time decay that I am looking for.
Once I have looked at my Analyse Tab and then reviewed my net position Greeks, I might look at some selective positions and the current Delta of those positions just to see how close I am to my limits or adjustment zones for those positions.
In this recent selling off things move fast and I have to be ready because there were some serious chips on the table. So when reviewing this market the first thing I was looking at was the speed of the market. Later on, I will note adjustment techniques but I needed to know more about the market. Last week, the market was moving fast and my positions were showing that I was having too much risk exposure to the down side. Meaning, if I did nothing, I was going to loose money quickly to the downside. Why? Two things happened very fast.
1) Volatility shot up and this causes all option prices to increase in price. This alone can sting an account. Because I was already in positions at a lower volatility this sudden increase in volatility caused the same options I was in to be more expensive to get out of. However, this is fact of trading and happens when the VIX increases.
2) There is price risk. Because there is an increase in volatility this mean that prices are moving down fast so if there are Put strikes that are getting closer to the money this gamma is moving into the delta and that is also causing prices to increase.
Now inn some markets the price move is slower and somee it is very fast. As a trader, you need to be able to note these different markets because how you react to them might be different.
In this market, I mean dates between 10/9 - 10/13 or 3 trading days, the VIX went from 16 - 24 that is a pretty big move as we have not had a VIX move above 21 for a year. So this is a fast market.
I made several trades and enventually I will try to post them but it takes a lot of time and I have to recap what I did. In summary, my first gut reaction was to buy Put contracts to ensure that the account position as a whole did not get too over risked to the Put side. I bought Puts about three weeks out and generally close the money. As I tell some of my friends, I "Slapped on some puts" to help cushion the blow of the market moving down fast. This also offset my Delta position that was getting out of balance with my Theta decay. The next thing I did was to review my individual positions to determine how close to the money the market was coming to my short positions. If it would get too close then I was ready to make an adjustment.
With the puts I put on my goal is not to hold them long and they are functioning as a safety blanket. If I make an adjustment and my position risk is rebalanced then I will get rid of them. Many times at a profit. Or, if the market is throwing a curve ball, I might end up selling them back at a loss if the market, without an adjustment, has all my positions back rebalanced but now I am leaning too bearish and it is the extra puts that is creating this condition.
In summary, I think I made two adjustments last week. One rolling to the next month and one moving the Calls in and moving the Puts out but increasing my position size. Additionally, I was in an out of three sets of Put contracts based on what the market was telling me.
Today was a crazy day. The market was positioned from the beginning with the futures to have a sell off. From the start the market, SPY, was ready to sell off. The market started moving to the downside and the market was moving fast. So right off the bat, my Analyse Tab and Risk Profile was showing that I had too much risk to the downside. As the market dipped, I again put on some Put positions today to cover me as we went down. Now, these Put were not a ratio of one to one for my account so I was drawing down even though the Puts served as an offset.
At the peak of selling it did really look over done to me so I started to sell those puts back into the market. However, I was still nervious and I ended up buying more PUT and those ended up being a lose (top trade below) and I gave back the profits of the original put position. Looking back, I overreacted a bit. I was looking at my net liqudation dip and I kept thinking to myself how far does this thing want to go? So, I slapped some more puts on but at that point when volatility was very high, at least 30 on the VIX. So these puts were expensive and then as the market recovered a bit to the upside value went out of them fast. I got rid of them as I did not want a bigger lose.
The following are the trades for today 10/15/2014:
Today, was another day where futures were pointing for a much lower open. My first thought was here we go again. With a selling off I would again have to do some fancy footwork to keep my trades balanced from a risk perspective. I was hoping that I would not have to make any adjustments. This means closing a position or a side of the trade out at a loss and then reestablish it again. This would create some pain with Vega's being high. One reason as noted on the Oct 14th post, volatility is skewing bid ask spreads and the market makers have this wide spread to protect them self. This was very evident in the SPX where I found the spreads a bit wide. On paper, trades I was in ,that were not close to my strikes and normally Theta decay would have been coming out of, were now showing at a loss because there was spike in Vega because the VIX moved from 16 late last week to up over 30 yesterday elevating option prices.
So lessons I learned from yesterday and this sell off experience:
- Do not question the market or try to out smart the market.
- Be in a position to react and think about a plan A, plan B and plan C
- Goal is to not take big losses where there are limited funds to recover from. As some say, do not blow the whole account.
- Better to be wrong but have insurance (PUTS) in place than to try to question the market or try to be right. This is how you get your butt kicked. If in doubt I should buy more insurance.
- Be thinking about how to free up funds as having some extra cash right now would be good to enter some high probability spreads. Last two days this has been hard with the VIX move as everything is expensive for me to get out of.
After the early sell off, we saw a recovery to the upside. This is something I wanted and was how my account was positioned. Meaning, a slow down in price movement or a recovery to the upside would benefit me and get me back into a comfort zone to get back to a point of waiting for Theta decay. My account is not trying to pick direction but sometimes I have to over weight in one direction or the other to help balance things out more. This took several years for me to get better at understanding.
Today's trades were really about having insurance on during the early morning sell off and then taking that off as the market showed signs of slowing down and moving back to the upside. As I put the 15 contract put trade on, I was not trying to be right. What I was trying to prevent was a multi thousand reduction in net liquidation value if the market wanted to breath fire on weak hands. The market did not do this, so this 15 contract insurance trade was a loss but helped with that spike in emotion that many traders get when the market wants to release some furry. Experience has told me you do not want to stay in the way of that furry. For you novice traders, this is how your account gets wiped out and there you are having to start again. ALWAYS remember that you want to fight another day. This means you have to have that Plan A, Plan B ready because if you wait on the market many times you will just give your money to someone else.
Today, at least so far, we see a rally to the upside. So I will more than likely not trade today but will just let time decay for the day and review where the price might settle. No position needs adjusting and I am happy to see the deltas come out of the Put side of my positions.
Here are my current positions:
IWM Positions:
SPX positions:
SPY Positions:
Benefit of the Journal:
One of the big benefits that I am getting out of the journal is the energy in my brain that is used to manage my account and trades is now being transferred from my head to this forum and that is helping to clear my RAM, if you will. This is helping a lot with some of my stress and possible anxiety that one might get from trading. Helps me clear the slate.
Today concluded and I made no trades. Many existing positions where the delta was higher on my put positions was lowered today. Additionally, the VIX finished at 21 today after being at 30 just a few days back.
The following is my current Risk Graph of my positions. It is telling me that things are generally balanced but if the market goes on a spree to the upside then I will either have to make some adjustments to re-balance things. There is a chance this risk graph is a bit skewed because I have some worthless positions that expire tomorrow. So I will have to recheck on Monday. I will start thinking about if the market climbs next week what I will want to do. Right now, my goal is to close this month up. So I am going to manage so that I do not have to roll any losses into next month. I close the books each month and I want to be in the black this month.
This week was a great week to start a journal with the style of trading I do. How so? Because this was such a non-traditional week of theta decay. This is where I had to tap into some additional skills that in past I was not very good at. So this was a week to apply lessons learned. Trading Iron Condors is a craft and really requires study.
Again, I trade Iron Condors, a non-directional price movement strategy. Generally, I am a high probability trader with an 80% chance of having the options expire worthless. This means, I am looking to enter vertical spread trades Calls and Puts where the delta is about .10 for calls and -.10 for puts. In an ideal month with no real price movement or and increase in the VIX, I just sit around and the time decay to come out of the trades. Sometimes, I let them expire worthless and sometimes I take them off.
In my experience, you cannot just have a plan for the ideal situation. You need to have other plans that you will deploy when various market action happens and that action can come in different forms. For example, you might get the slow low volatility climb in price. This happened last year and the early part of this year. This threatens the call side. This week's action we saw were big price movements to the downside and an increase in the VIX. Unlike the slow climb to the upside, this move was a fast move to the downside.
This is the situation that an Iron Condor trader has to be prepared for. Why? When you look at the risk reward graphs of Iron Condors, if the price is at a point where your short strike is in threat of being hit, the price to get out of that side of the position is very expensive. I believe the risk to reward is about 8:1 meaning you risk about 8 times the reward. This alone keeps many traders away from this strategy. What this Risk Reward ratio tells us is that you have to have a management plan to consistenly get the rewards without having to get consistently hurt by the risk. Additionally, what might happen is that a trader makes money for about 6 months and then when there is a big price or volatility move they end up giving back all the profits or face a loss. When this happens, a lot of emotional damage can be created and traders will abandon the strategy.
So why trade Iron Condors? One reason is because if they are properly managed they can provide a great return on the amount of capital that is used to put on the Iron Condor strategy. There are several reasons for this that I will try to cover later..
This week the market threw big price moves and big volatility movement at Iron Condor traders.
Plans executed:
Goal is to not give back lots of profits or capital when this happens.
Manage my Deltas so that they do not get too big in comparison to the Theta.
- You can do this by taking short positions off on the Put side. (Taking risk off)
- You can also reduce the Delta by buying puts that have enough negative Delta to counter balance your positive Delta. (Buy Insurance)
- You can also move the position in the same month but further out. However, if you just move out the position with the same amount of contracts you will have some form of loss. (Roll, but get bigger)
- You can also roll the position to the next month following your business rules for establishing a position. (Buy Time)
For me, I was already in positions that I was generally happy about the price on so I really wanted to just make sure I did not panic and do something stupid. So I bought puts to provide me some downside protection. I did also have to make one adjustment on the SPX where I rolled the 1830 - 1820 PUTs in the current month to the 1775 - 1765 strike. Since I took a loss on this side of the trade, I then decided to get into an extra 10 Call contracts of the 1965 - 1975 strikes for a total position size of 30 contracts.
Now I will sit tight and see what the market wants to do next week.
Great start to your journal. This was the craziest week indeed to put on Iron Condors etc. I personally decided to pause my usual credit spreads until I complete my automated trading system which will automatically hedge my SPX spreads/condors by buying/selling futures around the clock. Hedging with puts was always a risky bet because of the high cost to carry (burning theta etc).
Also in the past few months the market moved against me in the overnight session during hours that puts are not available (with the exception of puts on futures) but I didn't want to be glued to the computer 24/7 in fear of the market running against me and was loosing sleep. So thats when I embarked on a mission to put on auto futures trades so automatically if the market moves big against my spread I'll at least be making money with the futures hedge.
Thanks for your feedback. On the puts, there is the cost to carry, but for me this is only a short term insurance policy and I have no expectation to hold till experation. I just want to hold until the markets are more calm and I can reestablish my positions for that Theta decay. My real goal is too prevent accute pain from the quick market move and maintain confidence that I will be a position to reestablish new trades and preserve capital.
If you feel like you are glued to the computer too much then the Delta of your spreads must be higher? I assume 20+.
Another consideration, is the amounnt of commission cost you might take on to constantly hedge. You might want to create a Delta threshold and only hedge at that level. For example a Delta of 28 or 30. Then you hedge. Just some thoughts.
