In my previous life as a writer, I've been a published novelist for young adults. I've always loved figuratively looking over the shoulders of other writers, seeing how they manage their writing days. Now that I spend the majority of my time trading and writing about trading, I love to look over the shoulder of other traders, too, seeing how they manage their trading days.
In fact, I'm soliciting comments from traders about how they handle mobile access to their accounts. Does anyone use a netbook, for example? Currently, I'm sending alerts to a Blackberry, but the mobile platform on one of my brokerages does not allow trades to be placed as spreads, so I need something other than the Blackberry. I thought other traders might want to see how the community manages these issues, and I'm sure there are others who are more technologically advanced than I am.
If you'd like to participate by sending me a paragraph or two of description of the equipment you use for mobile access and its pros and cons, I anticipate an article that's a compilation of comments from subscribers. Be sure to let me know if you feel comfortable with your comments being included and if you want or don't want your name mentioned.
I thought I'd let you look over my shoulder to see how I manage my trading day when I am at my desk and not relying on mobile access via the Blackberry. Please let me assert first that I'm not presenting myself as the expert who does everything right. I'm currently in the process of roughing out an article that will appear in the next week or two, detailing how badly I messed up one of my MAR iron condor trades when I had six sets of iron condors in two different expiration months, one butterfly and one calendar--all in three different accounts--all requiring adjustments within a thirty-minute period. I don't often veer away from my trading plan, but I'll detail the situation that convinced me that a creative and soon-to-be-bungled solution outside my plan was the most workable one. I'm experienced and usually can rely on myself, but I'm not the paragon of trading. Not this month.
Still, it might be useful to get that over-the-shoulder look, even if I'm not the paragon of trading. My trading day actually begins the afternoon before any given trading day. I look over my trades and see if any are close to an adjustment point. Would a gap up or down the next day push my trade past that adjustment point or past my preset maximum loss? Are any potentially market-moving events to be announced the next morning before the open? If there are and my trades are close to an adjustment, I'll consider an early adjustment, looking first at a risk graph. For example, on March 3, markets had been on a tear, but the OEX had ended the day with a doji-type daily candle, indicating the possibility of a reversal. I had an open OEX-based position at the time, an adjusted MAR butterfly using the European-settled XEO version of OEX options. The expiration breakeven of the original 3-contract butterfly had been hit, and I'd adjusted at that time by adding a 3-contract second butterfly, so that the position was now a double-butterfly position.
Several potentially market-moving events were scheduled for the next morning--weekly unemployment claims, pending home sales and factory orders--but only the weekly jobs reports were scheduled for before the markets opened. That report would likely be watched closely ahead of that Friday's jobs report.
XEO MAR Butterfly Trade Expiration Profit-Loss Graph:
The red dot was placed at the then current OEX price that afternoon. Prices were still within the expiration break-even. While close to an adjustment point, they weren't quite there. I had a decision to make. Adjust early or not?
That's the graph at expiration, though. What would the potential profit and loss look like the next day?
XEO MAR Butterfly Theoretical Profit/Loss as of March 4:
The position was profitable at the close on Wednesday, March 3, and if the OEX retreated the next day, as some charts suggested it might, I was in position to soon collect some good profits on the position. However, if the OEX kept running higher, my profits might soon evaporate.
For those who like to study the Greeks, the delta was theoretically at -102.79, meaning the position would theoretically lose $102.79 for each point the OEX gained and gain $102.79 for each point the OEX lost. Theta was theoretically 50.26, meaning I'd theoretically gain $50.26 for each day that passed, and theta was at the point where it should start kicking up rapidly. The position had a vega of -99.32, which meant that for each 1 percent that the volatility dropped, I'd gain $99.32, but for each 1 percent that it rose, the position would theoretically lose $99.32. Since volatility tends to drop as prices climb, I figured that the vega gains would somewhat offset any losses due to the negative delta.
So, what to do? A standard deviation would have the OEX moving between approximately 507.09 and 516.34 the next day. If the OEX climbed and volatility dropped 1 percent, the breakeven for the next day would actually broaden, and the position wouldn't start losing money until about 513.97. At that standard deviation mark, it would have lost about $275.89, which is lower than my maximum loss. I'd have time to adjust.
After such a strong run-up, I wanted to be leaning a little short deltas, but this was a bit too much. The deltas should have been addressed, but I had a problem. This was only a three-contract trade on my BrokersXpress account, which has a minimum ticket charge. Therefore, I didn't want to adjust any more often than I absolutely had to do. Moreover, that doji that the daily OEX candle was producing was speaking to the technical analyst in me.
My decision, taking everything into account, was not to adjust that afternoon. As this article is edited for publication, I still hold that position, although it of course eventually needed that adjustment. It was one of the positions I adjusted on March 5. It's now a single butterfly, and it's now in the red. However, there's still plenty of potential for profit, although if the OEX keeps chugging upwards, that potential will soon evaporate. My maximum loss has still not been hit.
Either the night before a trading day or early the morning of a trading day, I look at the time before expiration for the relevant months and determine if it's time to open new positions. At the time this article was first roughed out--17 days until MAR expiration, 45 days until APR expiration and 80 days until MAY expiration--it was too late to open new MAR positions. I was already in all my APR iron condors, since I enter those about 57-62 days before option expiration. It was too early to consider APR calendars and butterflies, as I'm trying entering those in the 25-40 day range as I experiment with how I want to handle those. Eighty days before MAY expiration, it was way too early according to my trading plan to consider MAY positions.
So, I didn't have to worry about adding new positions, just adjusting currently open ones. It was time for a quick check of the alerts I'd set as soon as my trades were filled. Depending on the type of trade, those are based on either the price of the underlying (calendars and butterflies) or on the delta of the sold strike (iron condors). Depending on changes in volatility, some expiration breakevens or adjustment levels can change as the trade progresses, such as those on a calendar or butterfly, so it's necessary to recheck.
I made sure I'd updated all the trading plans for my trades. For example, on the run-up on March 3, I'd adjusted a RUT MAR/APR double calendar by removing the lower calendar. Those trades had been entered in OptionsOracle so I could keep track of the current profit/loss. I updated an alert to let me know that if the RUT climbed past a certain point, it was time to consider adding another calendar. I updated my written-down trading plan for the RUT trade. My notes in that trading plan included the following:
On March 3, the RUT moved to and through the expiration BE. I adjusted by removing the bottom calendar. There didn't seem to be a good adjustment for adding on, however, that improved the position, and I'm close to the max loss, so no further adjustments were made at this time, although I have set an alert to review the possible adjustments again if the RUT climbs tomorrow. If I were adjusting by the Greeks, I don't know that I would have done anything about a -6.25 delta on a RUT position after the RUT had been on a tear anyway. I want a negative delta to offset the negative vega and this isn't a very negative delta. My thought is that the RUT, on a tear and producing a doji (selling into the end of the day), is perhaps due for a pullback.
Of course, as this article is edited in preparation for publication, it's probably apparent that my alerts started sounding on this RUT trade and it was finally exited for a maximum loss when I couldn't come up with any adjustments that looked viable. Setting those alerts helped me manage the trade, although alerts sounding within minutes of each other on eight different trades didn't make for smooth adjustments. That trade wasn't a failure, though. Occasionally, trades are going to lose and when they're handled appropriately, they're not a failure, just part of the trading life.
After setting alerts and making sure trading plans are in order, this is the point at which working or traveling folk would also set contingent orders based on adjustment levels for their trades. I don't set contingent orders although when I originally roughed out this article, I typed these prophetic words, "I'm evaluating whether I want to start setting 'catastrophe' orders below the market in case everything goes crazy one day and everything needs adjusting at once, before I can manually get all the orders in." Just two days after the article was roughed out, all those alerts did start sounding at once, and it might have been best if I'd had at least some contingent orders set.
Although I haven't been setting the contingent orders up until now, my alerts include telephone numbers to brokers and extensive instructions on what I want done. For example, one alert was a delta-based one on a MAR bear call spread, the only remaining part of an original iron condor. The note said that if the delta of the sold strike move past 22 and through to 24-25, I was to take off the entire spread. I was to consider waiting a day and then rolling into 1.5-2.00 times the original number of contracts, at delta of up to 15, an adjustment that I'd consider risky for all but the most experienced traders. Once a delta reaches 15, it ticks up pretty much in concert with any tick up in price, and can reach that 22-25 level again rather quickly. The alerts are sent to my husband's phone, too, so in the event that something untoward happens to me, he can phone the broker or trading desk with instructions. The instructions aren't just meant for that "untoward event," though. They're also meant to remind me what to do if there's enough stress around the time the alert sounds that I get rattled. Those alerts were to sound one after another in quick succession on Friday, March 5, and many bear call spreads were taken off, some to be replaced that next Monday.
The next morning, March 4, I planned to watch how futures were behaving in accordance with fair values and also how they moved in accordance with overseas markets. Our markets are vulnerable to news-based moves due to what's happening in Europe and Greece. I always want to know if our futures are responding by moving in the same direction as Asian and European markets do. That's important. For example, if European markets are dropping but our futures are staying strong, that would have told me that I might need to be especially vigilant about that upside BE in my XEO butterfly and RUT calendar.
Then I make sure I have orders in to close all the component spreads of my iron condors for $0.20. You never know when prices might jump around and you might get an unexpected fill. I put these in premarket when the order is to collect or lock in a profit, such as with these condors. However, I absolutely do not put in orders pre-market when I'm going to be taking a loss. Those I put in manually after the market opens, because in this case, you don't want to accept a higher loss than you might need to take. You could get a fill when there's an odd movement, a blip in the markets that's soon reversed. If I worked full-time away from the markets, I'd of course have to put in those contingent orders to get out, but it's best if you can to have an alert sent to you at work and either call the trading desk or sign onto the account and work the trade manually.
I try not to lock in those losses in the first 30 minutes to hour of trading if I can help doing so. Early moves are so often reversed and options prices tend to be overpriced during this time period. That doesn't mean that I'll elect to let losses grow too big when I sit on my hands. However, there are times when, if my profit/loss chart shows a fairly level profit-loss line for a few points, I'll grit my teeth as my adjustment point is tested. I wish there were absolutes in trading, but there just aren't.
And that's about it. I'm set up for the day. I head out for a jog with the dogs to calm my emotions and am back, bathed and refreshed, my "Joseph Schmidt singt Arien" opera music in the CD player, at my computer when the markets open. My brokerage pages are open, my charts are running, and I'm ready. Or as ready as I'm going to get.