"I feel as if I'm going astray with this trade this time," I typed in my trade journal on April 20. I'm gravitating to a new trade after having been a hidebound iron condor trader for many years. When I try out a new trade, I keep a detailed trade journal for at least the first few months.
My preferred journal type may be different than your preferred journal type. Many of our subscribers are engineers or programmers who prefer spreadsheets to track their trades. They could write their own Excel how-to manuals. Their trade journals will look different than mine. I'm a physics/novelist person. I want a story, a story full of compelling forces and character development. I want to know what I was thinking, what I was seeing on charts, or maybe whether my trades filled at the mid when the markets were moving fast or I had to chase the order. Which exchange filled my orders most readily? Because I battle a health issue, I want to know if I make more trading mistakes on the days when I battle the hardest.
My intention is not to sway anyone to use my simple tell-a-story trade journal. My intention is to convince subscribers to set up a trade journal that meets their needs, particularly when trading a new strategy or a new underlying. My true confessions in this article are meant to show how easy it can be.
The butterfly I was trading that day was a May expiration trade. My trading journal went on to detail the reasons for that confession that I might be "going astray." Life had happened and there was a sudden, unscheduled need to be away from the office to help someone. The post also included the comment that there had been a "huge zoom up, but within the band in which it's [the RUT] been zooming." The post went on to conclude that "I had no choice [due to the emergency situation] or felt I had no choice but to neutralize the trade without waiting for the very end of the day, as I would have liked to have done." I tend to adjust this particular trade only once a day, about ninety minutes to an hour before the close.
Graph Included with April 20 Post in Trade Journal:
The red tent shape shows the profit and loss at each price point at expiration. The vertical red lines show the then-current RUT price, 806.59, and the expiration breakevens. However, I wasn't worried about expiration that day. Remember that the RUT had been zooming, but moving in such a way that I felt that big price moves could come in any direction. Due to that emergency situation, I might not be able to check the markets as frequently as I would have liked under those conditions, even with my smart phone or air card and netbook combo. No, I was looking at what might happen over the course of that afternoon and maybe parts of the next day.
The white line, not always clearly visible because it moves along the "0" line for much of the graph, details the potential profit and loss that day for each price point. Sizing requirements forced me to cut off a portion of the right-hand side of the chart, but that white T+0 line pretty much tracks the "0" line for quite a distance as the price rises. Barring a huge change in implied volatilities or price moves, the next day's T+0 line was likely to look similar. As you can see from this chart, when I "went astray," I had done so in order to ensure that even if I was called away from my office for an extended time, the trade would probably be okay even if the RUT moved big.
However, I hadn't stuck to my intention to adjust only once a day, closer to the end of the day, and I am an avowed rule follower. Hence, I made the comment about feeling as if I were going astray. It was exactly that sort of thing that I wanted to track in my tell-a-story journal. Can this trade withstand non-standard adjustments necessitated by real-life events?
A few days later, on April 25, I was behaving and following my guidelines but the Greeks of the trade certainly weren't! Here's my April 25 entry:
Yesterday immediately after the close, the deltas got very negative, way beyond the adjustment point. This morning, indices gapped higher despite bad numbers (heightened QEIII hopes ahead of the FOMC announcement?) and the news that the U.K. had joined Spain in a technical recession. Immediately after the open, my deltas were -52! However, they began sinking lower and were in the -30 to -33 range until right before the FOMC announcement, at which point they decreased a bit when markets pulled back. Into the FOMC press release, they rose considerably again. However, all through this, I had been watching the adjustment I intended to make (roll the 790 calls out to 800's, so that they [my then-current 780/790 spreads] were [widened to] 780/800 spreads). They weren't changing much in price. At about 2:00 [CT], I elected to go ahead and do them. Immediately afterward, my delta went to about -12, although when I had modeled it, it was -15. However, it jumped again in the few minutes I typed this and are now at -18.45 as I type.
End-of-Day Chart for April 25:
I was detailing the way the Greeks were changing in response to important economic events. I adjust based on the Greeks, so it was important to me to watch the way they change. They might not be as important to someone else who adjusts based only on price movement toward expiration breakevens, for example. However, my goal was to familiarize myself with times when I needed to react immediately or just walk away and ignore what I was seeing.
This trade was closed on Friday, May 4, for a profit of $1,490 or 8.4 percent of the maximum margin during the course of the trade, $17,744. I closed it because the profit was available and I didn't feel comfortable with what I was seeing on the charts, as I've been detailing in my Monday Wraps. The first few months I traded this trade, the initial trade journal entry had noted that I planned to get out two weeks before expiration. Strange things can happen as gamma-related risks rise in the last two weeks and particularly the last week before expiration. I hadn't wanted to carry a new trade that far into expiration until I knew how the trade behaved under different conditions. That's true even though I am trading this in much smaller size than I've typically traded iron condors in the past. I didn't have that same notation for the May cycle because I'd traded through several cycles, but this is what my notation for May 4 said:
Closed out the trade on a big downdraft after the non-farms payrolls disappointed and the RUT dropped to 798-800. I closed by closing a call debit spread/butterfly/call debit spread/butterfly/IWM, keeping the deltas flat. Made $1490 or $298/unit.
This might not be the way you want to trade, a careful, don't-take-too-many risks way that tends to produce lower profits but a more even profit-and-loss record. At least, that's my hope. I know some of my trading friends shake their heads at the potential profit I leave on the table, so I'm not presenting myself as a paragon of trading, but rather letting you listen to my true confessions. This certainly might not be the way you want to set up a trade journal, a talky trade journal. I'm not promoting my rambling train-of-thought type journal as the best one to employ. However, I am promoting a trade journal for new trades. I am suggesting that you think about the many influences on your trading and not just the price you pay for each component. When I traded iron condors exclusively, I knew that the profit-and-loss figures I was seeing sometimes bore little resemblance to the actual profit or loss if I were to close the trade at that point. I knew how to compute the likely actual price. I knew that because I'd made observations through the years. Now I'm making these kinds of observations with this new trade.
And now, before I ramble longer, it's time to close this article, too.