A couple of weeks ago, I offered a few suggestions for facing the storms that the VIX's value might be predicting. Did I follow my own advice? I did.
Since my task here is to invite you along on the experiences of a self-taught trader, I thought we might learn together from my experiences. I traded smaller. My April iron condor was planned for only 15 contracts. I start my iron condors about 55-65 days out, so that iron condor was begun at about the same time as my March butterfly. In order to keep the margined amount small on my butterfly, I traded the SPY instead of the big index. I also wanted the liquidity of the SPY contracts in case we saw some fast-market moves.
In that article two weeks ago, I talked about some of the pros and cons of unbalancing an iron condor, by putting on fewer spreads on one side or by narrowing those spreads on one side. Understanding well the risks I was taking, I unbalanced my iron condor. My intention from the beginning was to sell more call credit spreads than put credit spreads, and to leg into the position. At various times in my trading career, I have legged into the iron condors spread by spread or put them on all at once. Be sure you also understand the pros and cons of this tactic before employing it. Have a plan for what you'll do if you don't get the looked-for big swing in the opposite direction, allowing you to swing into the credit spreads on the opposite side. In my case, my intentions are to sell the opposite-side credit spreads within 10 days to two weeks of putting on one side. If there hasn't been an expected swing the opposite direction within that time, then I put on that opposite side anyway. This time, we most definitely got the swing the opposite direction within that time frame.
I began with the 15 contracts of sold 1425/1435 call spreads. I had opened those a day before writing that first article, on February 17. During the sharp decline the next week, I sold 8 put credit spreads at the 1150/1140 strikes on February 23 about midday and then 2 more at 1125/1115 when the SPX keep trading lower and volatilities had expanded, allowing me to throw those put spreads further out. As soon as I sold the first batch of 8, I bought put insurance, spending somewhere between 10-15 percent of the credit I had taken in. As you can see, I ended up with a big range between my sold calls and sold puts. However, if the SPX had steadied and climbed after I sold the call spreads, never pulling back, I would have sold the put spreads anyway within 10 days to two weeks, and I might have instead ended up with a narrower range than if I'd put them all on at once. That's one of the dangers, but if that had happened, the SPX would have been showing me that it was more likely to climb for a while, and I would have felt safer with the put spreads, wherever they were.
I had suggested that some traders might consider taking profit when it was offered, settling for smaller profit than they would normally. I did that, too. By February 25, I had bought back a 2-contract iron condor at 1435/1425/1125/1115, and I closed other contracts that day and the following Monday. My end-of-day theoretical profit-and-loss figures since February 18 have varied from -$150.00, +$112.50 on the day of a 3.03-standard deviation downside move with a 31.6 percent increase in volatility, and up to $752.50. After I've closed positions, I have used subsequent bounces to sell new call credit spreads, but always in reduced amounts, closing them as quickly as profit is offered. My remaining trade is a 10-lot call credit spread, a smaller risk than that with which I started.
Not all those theoretical profit-and-loss figures can be believed. You can bet I was trying to close out that trade for that +752.50 profit since it was offered just a few days after I'd finally added the 10 put spreads, but no one was willing to help me out on the trading floor. The point here is that even with the huge moves, I was always comfortable sitting here at my trading desk, watching the profit-and-loss figures. I knew it was more important for me to stay in my comfort zone in that kind of market environment than it was to make tons of money.
I suggested that some traders might consider adjustments that take off risk. We option traders often have a lot of adjustments at our disposal. If a trade is threatened on one side or the other, I often choose those that reduce risk. I may control deltas by buying back one of my sold options rather choosing one that adds additional risk. My trading plan for my butterfly this month included stepping into the butterfly gradually, but when the whole trade was on, further adjustments often included taking off a sold call or put, or moving the short options closer to the long options, or vice versa, also reducing risk. Such tactics didn't always make the best sense, but when they did, I chose to reduce the risk by lowering the margin.
I also suggested that some traders might consider adjusting a bit more quickly to avoid too much price-related risk, as measured by the deltas of the position. A follow-up suggestion that traders not over adjust was offered in last week's article. This came into play with the SPY butterfly, entered on February 15. Here my efforts were diligent but less successful. The butterfly was challenged on the upside the day after I'd entered the trade, and of course was subsequently challenged on the downside during the next week's strong decline, necessitating other adjustments. I tried heed my own advice not to over adjust--I never changed a positive-delta position to a negative one, for example--but the weight of the multiple adjustments kept sinking that expiration profit-loss chart and narrowing the expiration breakevens. More adjustments were necessary on the subsequent strong rally. I trade butterflies with a 20 percent profit target, allowing a 25 percent loss on the maximum margin during the course of the trade. As I type, the SPY is centered nicely right in the center of the tent-shape of my profit-loss graph, with the peak of the graph no longer quite reaching my previously planned profit. However, the original trade and adjustments have cost me a hefty amount in commissions, and adjustments have locked in losses on some portions of the trade. As I type, it's under water by 13.58 percent or $462.50. That's not my maximum loss, and the trade is for now centered nicely with the possibility of a much lower loss, breakeven or even a profit . . . if the markets cooperate, so I'm still in the trade.
Another bit of advice I offered for consideration is that sometimes, no matter how well you think you're trading, a trade is going to lose money. That may be true with this SPY butterfly this time. This one may sink under the weight of the adjustments due to all the multiple standard-deviation moves during the course of the trade. While this trade was open, the SPY moved down 2.79 standard deviations one day, up 1.07 another, down 2.07, up 1.80, and is down 1.55 standard deviations as I type. The butterfly has narrower breakevens than an iron condor, and I placed it a few days earlier, so it's been subjected to more big moves. I just may not be able to rescue that trade. Better that I heed my planned maximum loss, if it's hit and I can't find a workable solution, than that I lose all $2,755.76 of the margin still in the trade. In fact, if I see the profit-loss chart change in a way that shows me it's not worth staying in the trade and trying to struggle with it, I will close it before that max loss is hit. For now, profit remains possible, and I'm learning a lot from managing this trade. I have been evaluating which type of butterfly adjustments suit me best, and this has allowed me to test my adjustments and my reactions in a real situation, but with a small SPY trade.
If you've added up numbers, you know that this will likely be a flattish month for me. Maybe you think I went to a whole lot of effort for nothing, but I don't feel that way. I learned a lot. I never let my risk grow too large. I prepared for the possibility that volatility would increase, but I was also prepared to profit if markets behaved. Sometimes we see signs set up that show us that it's a good idea to move into a defensive mode, but nothing happens. If I'd gone all out and purchased puts, sure that I knew the direction the markets were going, I probably would have long since been stopped out at a loss on one of the big rallies.
I wanted to offer this recap because we traders can castigate ourselves too much if a trade doesn't work out, and some of you may be doing that after this last two weeks. If we feel too much shame about a trade that doesn't work, we're more likely to hold onto it, letting the losses grow larger and larger. I think it's rarely hubris, rarely a sense that we can pull a rabbit out of a hat, that makes us hold onto losing trades. Instead, it's often a sense of shame that makes us desperate to repair a losing trade. If we were salespeople, we'd expect that not each cold call was going to result in a sale. Our business is trading, and not all trades are going to work, even if you're trying as hard as possible to make the adjustments as needed and not let the trade get out of hand. If good intentions and even some degree of knowledge were enough to avoid that, then almost all of us would be millionaires.
If, this weekend, you're looking at a losing trade, castigating yourself, stop feeling such shame. Shame is useful if it keeps us from repeating a bad behavior, but not if it leads us to other bad behaviors. It's far better as traders to put it behind us and move forward with a plan for avoiding that particular shortcoming that got us into trouble. If the trade is still open, think this weekend about whether it still has profit potential or whether only a miracle will rescue it. Sometimes miracles do occur--ask me about my walking, talking, bike-riding six-year-old granddaughter who wasn't supposed to be doing those things, ever--but waiting for miracles has no place in a trading business. To reiterate a last part of my advice from a couple of weeks ago, when I look back on my years of trading, I have zero regrets about the trades I closed out just before the needed reversal occurred and I could have profited after all. I have big regrets over a trade or two when I didn't manage my exit well and let the loss grow too large. Don't do that, and don't castigate yourself for closing out a trade that needs to be closed, no matter what happens after you close it. Being able to take a loss at the appropriate time is among the most useful tools we have as traders.
But my true hope is that all of you have weathered this last two weeks well and that none have losing trades this weekend.
By the way, I'm not certain yet that all the storms are finished. The SPX has been forming a sideways triangle, and hasn't broken out of it either direction yet. Triangles don't predict which way a breakout will occur.