I had another article planned for this weekend's edition, but instead I'm writing this one. As I've mentioned many times, my goal as a writer is to take you along with me in my journey as a trader constantly honing her skills. Don't get me wrong: I've been doing this a while, so I don't consider myself a neophyte and wouldn't expect you to read what I've written if I were.
However, neither am I a know-it-all. Especially this month.
I have stayed with Reg T accounts because I just don't like taking on more risk than I have money to cover, in the case of some dire event. Few people intend to get themselves into trouble when they elect for portfolio margining, but some do end up using up all the available margin. They might find themselves, when the risk parameters have changed, spending a few hours one trading day trying to diminish the margin requirements to avoid a dreaded margin call.
So, the stories I hear have reinforced my own overly cautious hesitation. Because I've stayed with Reg T accounts and because I have, after long years of trading, become accustomed to some periods when I'm going to need to make frequent adjustments, especially in rolling my iron condors, I keep at least a third of my accounts in cash. Usually I retain closer to half or two-thirds. I had a cash reserve of almost 50 percent on Friday, March 5 when disaster hit.
Disaster hit in the form of adjustment points being reached in three sets of MAR iron condors, one set of APR iron condors (142 contracts in all), one three-contract XEO MAR butterfly and one single contract of a double RUT calendar. Not only did that happen all on the same day, but it happened within a few minutes.
Why was that disaster? Let me list the reasons. I have written trade plans. As soon as a trade is on, I set the appropriate price-based or delta-based alerts for adjustment points. I set up and stage the appropriate orders for those adjustment points so that I don't have to think about what to do when it's time to do it.
That was a few more iron condor trades than are within my comfort level, but I used to regularly trade 100-120 contracts within one month's expiration period alone, so it wasn't a huge stretch. Recently I've cut back because the market behavior has been odd, requiring more frequent adjustments than used to be necessary. However, as it was time for the APR trades to be opened, I still had a pretty full allotment of bear call spreads left over from my MAR trades. I questioned whether I should open those APR trades, but then looked at my written plan which stated that one-third of my account was for front-month trades, one-third for back-month trades in case they overlapped, and one-third for adjustments. So, I went through with the trades. It was in my plan. My carefully thought-out and, I believed, relatively conservative plan.
In all my years of trading, however, with trades in different strategies on different underlyings, entered on different days, I have never been faced with six different trades across three different accounts all requiring one or more adjustments during the same day, most within a few minutes of each other. And suddenly, what seemed ample money for adjusting all the trades didn't feel so ample any longer. I closed out all the needing-adjustment iron condors. I typically roll up on those contracts, into 1.5-2.0 times the original number of contracts to help make up the debit I spent closing down the in-trouble spreads. Depending on market action, I sometimes roll immediately or sometimes wait a day or two until I feel that the markets have settled down. In this case, I waited until the next Monday to roll up on most of the iron condors, although I decided to wait until after MAR expiration to tend to the APR RUT trade.
But leaving half my money didn't allow me to roll all those contracts into 1.5-2.0 times the original number of contracts to help make up the debit I paid for closing the offending contracts. I couldn't follow my plan. I was faced with a situation that I'd never before faced. I'd just been through a traumatic Friday afternoon when I was literally closing or adjusting trades as fast as I could do so, pulling up my saved orders and putting them through, checking to see if they'd filled, pulling orders that weren't filling and modifying them, and afraid time was going to run out on me before I could get them all filled.
That's when I decided, for reasons that remain murky and seem just delusional now, to hark back to my daytrading roots and essentially daytrade one of the taken-off spreads. I thought about risk all that weekend. What was the bigger risk, rolling into more contracts at a lower delta--therefore taking in less credit and having a higher margin requirement--or rolling into fewer contracts at a much higher delta? That second option would take in more credit and therefore have a lower margin requirement but the higher delta on the sold call meant that I was taking on much more risk in a market that had already proven itself to be a runaway market. I don't use technical analysis to prove to me which way the markets are going to go but rather to help me think about risk. The low-volume climb, the volatility measures that were approaching those hit at previous market highs and other signs made me believe that the higher-probability event was a slowing of the rally and at least a dip to the 10-smas that hadn't been touched in so long.
I decided that I would essentially leapfrog that spread, lifting it above the market and setting it back down when I thought the rally was topping. If I put it down and the RUT surged further--which of course it did--I could buy-to-close the sold calls and let the long calls run, again drawing from my daytrading background. Then I could either resell the bought-to-close strikes or sell-to-close the profitable calls.
And it worked.
A time or two. Then it didn't. And each time I attempted it, I dug a bigger hole. And I spent hours each night testing and testing various trades, asking myself questions such as, "Does this trade make sense today, and not just because I want to make up my original loss?" Some possibilities I excluded because I deemed the risk too great or my unfamiliarity with how the strategy would react to what I thought the market conditions were or for other reasons. I wrote out detailed game plans. I didn't just wheel and deal.
What I did was dig myself into greater and greater losses. Stupid losses. As I've pointed out to you in previous articles, and as my broker finally pointed out to me when I consulted him, crying uncle, we don't think clearly when we're stressed. Despite all the hard homework and testing I was doing, all the risk graphs I was running, I just wasn't thinking objectively. The panic I felt was making me react with the primitive centers of my brain, not the high-functioning, clearly thinking centers.
I doubled my original loss.
So, as a fellow trader asked, what's the takeaway? The first takeaway is that if your account is full of iron condors that you typically adjust by rolling up--or down--into 1.5-2.0 times the original number of contracts, then you're going to need more than half your account in cash. Although I hadn't ever had all my trades hit at once in just that way in all my years of trading, it happened this time. Not having enough money in the accounts to follow my typical plan or, rather, having trades to follow my original plan, meant that I had to go offroad with my trades, and I'm not that kind of driver.
Another takeaway relates to my trading plan. Items # 5 and 6 on my trading goals section for this year are the following: "5. Weigh the tactic of trading big positions in a single, well-known underlying versus varying trades across various vehicles. Which carries less stress?" and "6. A related concern: What is the appropriate trade size that tips me from calm adjustments into can't-sleep-at-night status." Even before that fateful March 6, I'd already talked to another experienced trader, telling him that I was gravitating toward one or two big trades versus lots of little trades since the "lots of little trades" version left me feeling too scattered.
I've got at least a partial answer to these questions I'd posed in my plan. I have found, through this last year of trying to vary my trades, that I'm not really a person who wants to have open trades employing four different strategies in four or more different vehicles. Despite the way I am vigilant about setting alerts, having six alerts triggered during one thirty-minute period, and then having the same thing happen for several days running is not an experience I want to repeat. I'd rather handle one or two big trades going wrong than eight smaller ones, if it's happening all at the same time. Maybe it's not going to be that common that they're all hit at the same time, but I still feel scattered watching over that many trades, and scattered is not a feeling that anyone should be having while trading.
The next takeaway is that, if the time for entering next-month trades rolls around and I'm still in a full allotment of front-month trades, then it's better to forgo the next-month trades. Something isn't working as it usually does, so the circumstances warrant extra caution. Better to forgo a month's earnings than to lose more than a month's typical earnings because you're too scattered by multiple trades to think objectively.
A last takeaway is that I perhaps should have just delta-hedged the account by buying enough next-month calls to cut the delta risk down by at least a half, and then talk to someone I trust. I was overwhelmed and should have sought help. Someone else wouldn't have had the emotional attachment to what was happening and could have just told me I was making bad decisions. If you don't have a broker, a trading partner or someone else in your life who can do that, find someone like that. I heard a fellow trader say recently that he and another trader call each other about thirty minutes before the close of trading each day and talk about how their trades are doing, if any are threatened, how they expect to protect against that threat, and other such topics. Good idea.
So, I've invited you along. I'm chagrined and disappointed in myself, but I'm not the first person to have experienced something like this and I won't be the last. In fact, March was a tough expiration month, and I've heard from lots of people who were disappointed in their performances. That doesn't give me an out. I made mistakes that are fully my responsibility.
I hope that you won't be among the ones who experience a month when you disappoint yourself in just this way. That's why I write what I do: so that you can think about these issues for yourselves and make decisions about what's right for you and your trading.
I'll recover. My accounts will, too. Despite hating the loss I took, I didn't decimate the accounts. There's still plenty of money to trade.