I am going to try to tie it all together.
First let's look at sequence of the trades and I will try to evaluate my decisions.
I started with the trade marked 7 and 8 (sorry for the sequence but that is TOS).
That is my normal monthly butterfly, as said before, I aim for a return of 20% on risk. Trade 7 is some extra long delta which I normally buy to compensate for the negative deltas from an ATM fly. I will try to cut my delta exposure in half by adding some OTM - longs. Quite early in the trade the market stepped down hard, without an enormous raise in the VIX. This allowed me to be profitable in the trade while getting close to the expiration BE's. Since width of the fly is calculated using a standard deviation move till Expiration, getting close to the BE so early in the trade is a red flag.
I first decided to defend the trade with a calendar @ the 790 (trade 9). Intraday the market and sentiment turn further south - So I decided to reduce my risk by taking the fly off (for a profit). In hindsight I have no 2nd thoughts on that decision. Taking a profit, reducing risk in that specific situation was prudent. The only question could be; did I overreact? I answer for myself with no.
The next trade was to re-enter a fly at the new ATM 790 (trade 1). Here I made an judgement error which came to bite me later. I entered that trade without reducing my delta with some extra long. I let myself be guided by an opinion that we would not revisit 840'ish so quickly. When we did, I had to make several adjustment (trade 2, 3 and 4).
In the meantime the calendar hit a 20% profit mark -- an alert fired to warn me -- I took it off @ target (trade 12). No comments on this decision.
Trade 5 and 6 gets me flat and returns a small profit of $150.00
So the question is why stop and why not fight longer. The answer lays in several (im)ponderable facets.
1. it had been a difficult month in comparison to a 'normal' month
2. I had been longer in the trade than normal, and had not much to show for
3. it was a difficult month but I had not burned my fingers.
4. In this 5-lot account I am up over 25% up for the year (25% over account value, not risk). In other accounts the numbers are even better, but there I take more risk (larger fly in comparison to the account size).
5. the closer you get to expiration the larger becomes Gamma and the daily swing in PL can become quite large even in a 5lot trade.
The sequence of my reason above, is the weight I gave to each argument. The first argument weighting the heaviest etc etc.
If and that is a big IF; I had added some extra long to the 2nd fly, that 2nd fly would have been in a better condition when we approached the expiration BE. Argument 2 in my why stop would have fallen away, and I could have given myself some extra time by adding a small new ATM fly or even a small fly a little bit above the market (as Ken suggested in his question). Without these longs I needed to choose between a potentially losing month, a scratch or a profit.
Commissions plays a big roll in this style of trading; my commission's bill is $75 for July.
Overall I am happy with my performance as non-directional trader. For me it is the only trade style which make sense. Of course considering my personality. I have deep respect for Billy and Pascal and the amount of research they do and their ability to stay objective while under pressure. Knowing myself, over time my research becomes sloppy and I will start to see profitable set ups in every bar. Non directional trading allows me to receive payment for market risk, while I don't need to second guess every bar on the chart.
Hope you enjoyed this series into the dark world of "risky" options.
Ernst
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Originally Posted by ernsttanaka
