At the Trading Triangle in Maui (I suspect I’ll be writing a lot of blogs that start with this phrase), we talked about Crisis Planning. We all know how important it is to follow our plan but do we have ENOUGH plans to cover ALL eventualities?
I found an interesting case upon my return. I have a TWT (Trading While Traveling) plan that allows for simpler, easier to execute adjustments. For instance, instead of rolling, I may use range extension techniques to minimize error and slippage. When I’m trading on a laptop without all of my extra monitors (AAARGH!), I just don’t trade as well and am more prone to making errors. My mindset is somewhat compromised, as well, because honestly, I’d rather get back to the hot and heavy action at the Trading Triangle than sit in my room and trade!
Ergo my TWT for Maui.
On Brexit Friday, I made minor adjustments, knowing that I would be home on Monday and could perfect the trade then. Monday came too early but I shifted my July trade around, executing my 40 adjustment trades perfectly.
Except that it should have been 41.
Yep, my OptionVue screen had scrolled down and I missed the last longs at the top. When I went to check my final position against what I had expected, it didn’t match and so I was more negative delta than I had planned. Normally this would be fine but my last trade was at 3:14 ET, so I was flat out of time. And too negative delta.
I was, of course, still within trade limits since all of my adjustments are planned out to be able to be stopped at any point, staying fairly neutral delta. But I was still leaning more negative than I was comfortable with, especially given the wacky market.
Happily, I had a plan! I had three choices: leave it alone, buy futures contracts or deal with it at market open the next day.
Now, let’s stop here for a minute and think about it. When you make adjustments, do you consider the fact that you may NOT be able to complete all of them? Do you have a plan if your electricity goes out, if you get an emergency call from a loved one, if your internet decides to take a break, or if you (gasp!) make a mistake?
(And since I mentioned it, let’s take a quick cosine or, if you prefer, a tangent) and talk about making mistakes. Do you have a plan for what you’ll do if you accidentally buy instead of sell, or get the wrong expiration or strike? Does it become part of the trade or do you back it out quickly? Either can work perfectly fine but it’s good to know what you’ll do beforehand… because, trust me, when you make that mistake, you’re sufficiently annoyed anyway so that you may not make the best decision.)
Back to our original question – what if you can’t complete your adjustment? What if it’s after market hours and you realize that you forgot to roll your weekly long call that just expired? If you want to hedge off with futures, do you have a futures account with your brokerage? Do you know HOW to trade futures or is it just something that you’ve heard people talk about? If you need some negative deltas, are you comfortable going short futures? If you’re going to trade at the open, are you accustomed to doing so? (Trading the open can be a completely different game, with pricing all over the place. If you’re not good with option pricing it’s really easy to get an astonishingly bad fill, possibly losing as much as if you’d just left the position alone.)
In my case, I decided that I was comfortable with the deltas overnight but would put on the original final adjustment after the first half hour of trading if necessary. Of course, the market went ripping up that day so all of you who benefited can thank me for the reversal. (I have no doubt that the market recognized my position weakness and pounced. Dang it.)
My July trade will still be fine but I gave up a little bit of profit with that mistake. The key, though, is that I gave up a LITTLE bit of profit simply because my adjustments are made to be stopped at any point. I also fixed it early the next morning then calmly went back to my original plan. I don’t know where my July trade will net out but at least I’m still in the game. Disappointed but in the game.
Being, of course, The Perfect Trader™, I hate to think that I could EVER make a mistake but the reality is that I’m fallible. (Yes, yes, I hear the gasps of shock from all of my beloved readers.) This means that I do have a plan for when things go awry. (I also have to deal with the psychological challenge of MAKING A MISTAKE – but that’s a topic for another day.)
If you aren’t The Perfect Trader™, tell me in the Comments Section below what YOU would have done (or plan to do) when you make a mistake.
Written and contributed by Cynthia Sarver, Successful Options Trader of the Month – February 2016
Gabor Maly says
Great article Cynthia! Making mistakes is part of the game and we better be prepared for it. Last year Aug when we had the big overnight drop I had a weirdor on, having made adjustment to it the week before. While I entered the adjustments I wanted to make in OV and I thought I was executing on my broker platform, reality turned out to be different. I bought debit spreads instead of selling a credit spreads. I only realized this on that black Monday and while it put me into good profit I immediately closed the position, needless to say I got very lucky. Since then I make the habit to reconcile my open positions in OV to the broker platform every single time I make an adjustment just to be sure as I know the above incident was not the last.