For about eight years, I wrote for the live portion of the Option Investor site, the Market Monitor. Because I monitored the markets moment by moment, I also monitored my trades that way.
By 2007, I had completed the transition from day trader to income trader, trading strategies such as iron condors. Theoretically, iron condors don't have to be monitored the way that day trades do, although it hasn't always felt that way this last year. However, it's hard to break old habits, and by that time I definitely had a long-in-place habit of watching my trades moment by moment. In addition to the pressure of habit, those crazy market conditions contributed to my unease about walking away from the computer screen, even momentarily.
Such attention to the markets is perhaps necessary when day trading, but it may be disadvantageous when trading something like an iron condor. One recent day, the theoretical profit/loss figures for my two-day-old 25-contract iron condor varied from a $586 loss to a gain of more than $1,300 in a few moments' time. The previous day, the figures had theoretically been far worse, theoretically varying from a gain of a little more than $600 to a loss of slightly more than $2,000. In all that time, the price of the SPX, the underlying in the iron condor, had varied by only 14 points total. During that 14-point range, my sold call had remained more than 100 points away the entire time, and my sold put even further away from the SPX's price, so the trade was never in any real trouble from a price basis.
What was happening? The implied volatilities were bouncing around, and there hadn't been time yet for any theta-related (time) decay to go to work on the position. In addition, my far-out-of-the-money and far-from-expiration October strikes were thinly traded. Someone putting in an order for a few contracts that just sat there without being filled could radically change the bid/ask spread. That, in turn, radically altered the theoretical profit/loss calculations.
Watching action like that can drive one nutty. Worse, it can impact one's trading results. I'm experienced enough trading iron condors to know what was happening, but even I threw up a few hedge combinations on an analyzer to see if I could dampen that jumping-around effect on my profit and loss. Although the iron condor was never in any trouble, with no sold strike being closely approached, my close attention that day and the discomfort I was feeling were prompting me to look for relief. If I'd just set an alert and walked away from the computer, all that angst would have proven unnecessary. A little more than a week later, I exited the trade for a profit, with no adjustment or hedge ever needed.
Such situations can lead to overtrading. While it's important to keep track of the risks we face by viewing our unrealized losses, overtrading can be dangerous, too. Commissions rack up. Some adjustments may mean taking a realized loss and resetting the whole trade. Theta-related (time) decay takes time to build up again. That exposes one to a longer time in the trade, with all the possible adverse price-related changes that can occur during that greater exposure. The fewer the adjustments, the better, most traders of complex options trades believe.
What's the solution? Walk away from the computer now and then. Get some balance.
But don't leave your trades unprotected while you do. I've talked recently about setting alerts and also about my beginning experimentation with setting contingent orders. Those original experiments were on paper trades which I have begun managing solely through paper trades. Now I'm trying them on live trades. I set up the contingent order, also called a conditional order by some brokerages, but I also set an alert to trigger right before the contingent order would trigger. That way I can go in and work the order myself if I choose to do so.
One obvious advantage to this system is that if you're called away from your desk at an inopportune time--something that does happen to all of us, not just those who work fulltime--the contingent order serves as a just-in-case safety net. Traders who never follow their mental stops, always telling themselves that the prices are about to reverse, might benefit from managing their trades this way, too.
Some disadvantages exist, too. I use think-or-swim's flexible system to set such contingent orders on the small live trades I'm trying out with contingent orders right now. These are not my usual trades, my bigger iron condors on the SPX, with its wide bid/ask spreads. Instead, these are smaller trades entered with the express purpose of determining whether these orders trigger on time, where I need to set the price of my orders under certain market conditions, and other such important tests.
With the TOS system, I can set up the conditions under which the trade should trigger and set the price at the mark (mid-price) plus or minus a certain offset, depending on whether I'm buying or selling. However, that order then goes through as a limit order. In quiet times, I might be able to sell an IBM put calendar that was in trouble for the mark plus a nickel or dime, but would I have been able to get through a complex two-pronged order like this on the flash-crash day on the SPX? Likely not. My limit order would trigger and likely not be filled. I might count on protection that wouldn't occur. Therefore, contingent orders must be keyed to the type of trade and the underlying.
Would I have even wanted a contingent order to trigger that day and then fill at levels so far distant from what I'd intended when I'd set up the order at the mark plus a certain offset? Or, would I have wanted to have watched for a moment? On the flash-crash day, I thought it entirely possible that a bounce would ensue at some point, for example. Because I was watching and actively trading, I had bought extra long puts before the SPX crashed, so I chose to adjust only half the bull put position rather than all of it as the SPX crashed. I closed the other half after the SPX had bounced back, paying far less of a debit. My losses had been somewhat cushioned by the extra longs I had bought, so that and the fact that I was watching meant that I was able to make decisions. Of course, setting an alert to trigger at a certain price point, which I had done, also would have let me know to get to the computer if I hadn't been watching moment by moment.
There's no one right or wrong way for all traders, all conditions and all vehicles. For complex positions on the SPX or OEX, an alert, with an in-case-of-catastrophe contingent order for hedging longs might be the better way to go. The plan would be to take off the contingent order and work it manually after the alert sounded, but to have it there in case that wasn't possible. I talked to one trader who was in an intense meeting when a trading partner texted him alerting him to the flash crash, but he wasn't able to break away and tend to his trades.
Many traders also feel that, if at all possible, it's best to wait until the first 30 minutes of trading, at the least, before they adjust a trade. Amateur-hour shenanigans can inflate option prices, and the first morning move is often at least partially reversed. Of course, if a maximum loss is quickly approaching, waiting may not always be possible. Think or swim does allow traders to specify that a contingent order would not trigger until after a certain time of day, but not all platforms are that flexible. Traders must evaluate then what they want to do about such circumstances. In my other platform, I sometimes pull the GTC orders until after that first few minutes of trading has passed and then put them back on.
There's just no one right or wrong answer to the question of whether it's best to set those contingent orders and let them trigger or actively manage all trades, using alerts remind one that a condition has arisen requiring an adjustment. Back in March, I had one alert trigger after another one terrible afternoon as one trade after another required adjustment in a few moments' time. In that case, it would have been most helpful if contingent orders had been in place, so that I could work the big trades manually while contingent orders were triggered on the smaller ones. Having contingent orders set has proven helpful in other ways, too. More than once, as I've seen a trigger point approached, I've wondered if I should pull the contingent order and rethink it, if I really wanted it set the way it was set. Because I know those contingent orders were set up after hours, when I had the time to think through all the implications and run the possible adjustments through an analyzer, my hand has been stayed each time. If I were the kind of person who ignored mounting losses, having a few contingent orders trigger at slightly disadvantageous levels would be a big improvement over a tendency to let losses mount.
I've chosen to move forward with contingent orders, at least on some trades. That's because I want to have a life away from the computer. I've come to believe that a rabid focus on the moment-by-moment ticks and tocks of the underlying could actually lead to fear-prompted overtrading. Life doesn't allow that rabid focus at all times anyway. Some traders have no decision to make: their fulltime jobs may keep them away from the markets during trading hours, and they must become proficient at contingent orders.
What are some of the most common mistakes traders might make when setting those orders? Based on my early experiences, some common mistakes include the following: setting day orders when you intended good-till-cancel orders; setting the trigger when price or delta is "at or below" a certain level when it actually should have been "at or above" or vice versa; and not rechecking those orders at the end of each day or couple of days, to determine whether time and volatility require changes in the triggers. I and other traders with whom I speak have sometimes thought we had a contingent order in place only to find that we had set day orders that didn't carry over to the present day, rather than the good-till-cancelled orders we'd intended to set. I've heard from other traders who forgot to adjust a trigger point on a contingent order that had been in place several days, only to find after a trade triggered that the adjustment that had been appropriate several days earlier now over or under-hedged the position by a considerable amount.
Even worse, I've heard from some traders who had a contingent order trigger days after they'd already exited the trade it was meant to hedge. They had forgotten to cancel the GTC contingent order.
It's not always going to be possible to set appropriate contingent orders on all trades. The platform may not be flexible enough to allow the kind of adjustment your trade needs with a contingent order. For those with small accounts, margin considerations may prevent you from doing so, too. Most brokerages withhold the buying-power effect of the order from the account, so if you've ringed each and every trade with a contingent order on either side, you may find that there's no money free.
As I've said many times, I'm not setting myself up as an expert but rather as an experienced but still-learning trader who invites you along as I wrestle with the changing market conditions. Perhaps my quest will prompt you to reconsider some aspects of your trading plan, too.