On Monday, July 29, Dot Hazlin was advising her Couch Potato readers that open trades would be closed early in the week, before that Wednesday's plethora of economic events. The often market-moving ADP and Advance GDP would both be released before the open that Wednesday. Chicago PMI would follow closely after the open, and the FOMC statement would be released in the afternoon.

I was thinking along the same lines as Dot Hazlin. That afternoon, when I uploaded the Monday Wrap, I included the warning that traders who didn't feel comfortable managing price and volatility risk in monthly, weekly or day trades should consider closing all or partial contracts and not entering new trades until after those announcements. By then, I had already closed my AUG butterfly trade, locking in profit.

I had locked in less profit than my target. However, I was going to be away from the market most of Wednesday and couldn't watch trades. I had no appetite for leaving trades open and unwatched with economic events that could break the RUT out of its recent consolidation zone, in either direction.

But why Monday? My trade was beginning to build up theta. Why not capture more theta decay, closing the trades out early Wednesday before I left for the day?

Risk Profile at about the Time I Started Closing My Trade That Monday, OptionNet Explorer Chart:

The theoretical profit, after commissions, was $1,429. Of course, this was based on mid-price. Closing out a RUT trade at mid-price has been more problematic since its complex options trades have migrated to the CBOE and no longer can be routed to the ISE. I had to come off the mid-price on almost all the components and netted $1,292.01.

The RUT's price were near the middle of the butterfly. While I likely would have reduced the deltas at the end of that day by selling one or more of the call debit spreads that were part of the trade, the trade wasn't in any trouble yet. It normally could have weathered a couple of extra days' trading while more theta-related decay occurred. Notice that theta was 229.50, meaning that I theoretically would have collected about $229.50 more each day that passed. Did I give up another $459.00 in profit, there for the taking, when I elected to close my trade on Monday rather than Wednesday morning before I left?

Same Trade, If Carried Forward until Wednesday Morning:

This is not a rolled-forward theoretical calculation, but rather a calculation based on actual mid-prices at the time the chart was snapped. This was snapped at about the time I would have had to be leaving Wednesday morning and would then be away from the markets through the FOMC announcement.

Some price movement has occurred, of course, impacting prices, but the RUT coiled in a relatively tight range. Moreover, price was still well centered inside the expiration tent. However, where is that extra theta-related decay? Instead of gaining $459.00 for the two extra days, this trade's profit has sunk from $1429.00 to $1164.00. I would be lucky to have cleared $1000.00 because other options traders and market makers would have been even less interested in dickering over the price on that day. They would have wanted to be rewarded for the risk they were taking in trading ahead of the FOMC announcement.

I closed that trade Monday precisely because I felt that there was little chance that there would be theta-related decay until after the FOMC announcement. How did I know that? I know it from experience, mostly. Implied volatilities tend to go up ahead of such important announcements. Then the pent-up decay tends to fall away after price movement has settled after those announcements. We see the same kind of effect occurring near earnings announcements with individual equities. In the week or two leading up to an earnings announcement, implied volatilities tend to climb even if prices tend to coil. That's not some conspiracy on the part of market makers and specialists to nail us retail traders. At least that's not the only reason. Rather it's market action working, plumping up the price of calls and puts as traders position their trades ahead of the important announcement.

We can read Bittman and Augen and do all sorts of calculations and spreadsheets, but for most of us, this is the basic effect we need to know: the expected theta-related decay may not occur in the run-up to an important announcement. That's important to know whether we're considering when to open or close a trade or whether we're just watching an open trade. Since I anticipated that very little theta-related decay would come out of the trade until after the FOMC announcement and since I had determined that I wanted out of the trade before that announcement, why incur further event risk?

My situation is different than that of many traders. I'm more cautious because appointments often take me away from the markets, and, sometimes, one appointment leads to many. While I usually don't mind setting contingent orders to fill if triggered while I'm away, I don't feel comfortable with those sorts of orders ahead of announcements that could have broken markets fast in one direction or another. Experienced traders who could watch and knew what they were doing or newbies with small trades who wanted experience handling a difficult situation would not have been wrong to stay in their trades. Neither were more cautious types or those who thought they could not adequately monitor their trades or who had too much at risk wrong for closing out part or all of their positions.

As it turns out, my trade would have been fine. I followed it as if I hadn't closed it until it reached my full planned profit. Do I regret my choice? No, I don't. I could just as easily have been wiping my brow, grateful to have escaped a hair-raising market move.