03 JAN 2010 Trading Plan
03 JAN 2010 Trading Plan
I thought a detailed review was timely to focus on the trading planning process. My trading plan for the day is largely derived from this Dashboard.
There are two areas of importance when making my trading decision; areas of opportunity and areas of jeopardy.
Opportunity - IC
In areas of opportunity we have two columns; IC and Spread P/L. The IC number is just a serial number of potential Iron Condors in my trading since I started trading this strategy in the account I report on in this journal. "Potential" Iron Condors, because it is not always possible to find a companion spread with acceptable risk and credit. However, as can be seen in today's Dashboard, most spreads have their companion.
When the cell containing the IC number is highlighted in yellow, that indicates to me that is a spread without a companion. Thus I will examine these opportunities to complete the Iron Condor if the conditions meet my requirements.
The attraction of forming an Iron Condor is that the companion spread will earn an additional credit without adding to the funds quarantined (sometimes called margin requirements). Some caution is still required as it does result in some additional risk.
Opportunity - Spread P/L
I track the Spread Profit/Loss in this column. The focus here is that there is opportunity when the spread nears its maximum profit, especially early in the life of the spread. In this column, I highlight the cell if it exceeds 80% of its maximum profit. You will note that spread number 39, a PUT in IC 17, is currently at 89% of its maximum possible profit.
When this happens I try to roll the spread. I.E., I will try to close the spread that has neared its maximum profit and open another closer to the underlying price. This means I earn another credit on the same series with the same quarantined funds.
Note IC #15. Spread number 33 was closed having reached 86% of its maximum profit and yielded 8.1%. Spread #48 replaced it and has already reached 67% of its potential with 17 days still left before expiration.
I have had as many as 5 spreads make up an Iron Condor due to rolling and have ended up earning over 50% return in one case.
The spread could also show a loss, however that is not dealt with here, but in the Jeopardy section.
Jeopardy - Probability of Touching
Our next area of focus for our daily plan is areas of jeopardy. The first is the probability of touching. This metric is a proxy for an estimate of my chances of having to close (bail out of) a spread at a loss. It uses information about current price, volatility, days to expiration, etc. to create its value.
This metric is meant to function as the "canary in the mine," giving early warning to upcoming required action.
Jeopardy - Days Until Expiration
The days until expiration is not a metric of danger as much as an indicator that managing these spreads require more time and attention. Some will choose to exit the spreads before the last week to avoid the extra work involved in managing during this period. They may have a work schedule that does not permit this level of effort, or they may not be confident in their skills in determining when to exit and when to let the spreads expire.
I let the spreads expire if the conditions are good. Good conditions in this context is a probability of touching of less than 10%. Otherwise there is a market gap risk between the time the options cease to trade and their evaluation at expiration. The RUT for example takes two days. For index options (the only underlying instrument I trade) market gap risk must be carefully considered before making the choice to exit the spread or let it expire.
Jeopardy - At Risk P/L
The capital at risk when trading credit spreads is the difference in strike prices less the credit received. It is approximately equal to the funds your broker will quarantine (margin) to protect them from the trader suffering maximum loss. "Approximately" as they often round up for their convenience.
At risk P/L is my key focus in risk management. If it exceeds 20%, I will issue an "at the market" closing order on that spread. Since I am bailing out of this spread without any protection, I may suffer as much as 30% depending on bid/ask spread.
So here we go with today's trading plan.
Opportunity - IC
Spread #68 is not yet paired to complete an Iron Condor. This is a weekly option series and this is Monday, so there is still time to complete this Iron Condor if conditions permit.
Spread #61 is also unpaired and their 45 days left until expiration.
Opportunity - Spread P/L
Spread #36 has reached 89% of its maximum profit, so a roll will be considered. The 89% is based on the Mark price, so bid/ask spread realities may not permit closing the spread at this level. Furthermore, a spread worth rolling to must be available before making this decision. In my experience, only rarely will a spread be closed and a new spread will no longer be available.
Jeopardy - Probability of Touching
No areas of concern at this time.
Jeopardy - Days to Expiration
One area of special attention. Spread 68 will expire in 4 days.
Jeopardy - At Risk P/L
No concern at this time.
