Friday, December 11, 2015

Week Ending Dec 12

As I said my plays are very tactical this week, in survival mode things get stagnant and slow, but that's when you never lose sight of the ball. We are still in the middle game and I've lost my main position pieces.
I have activated as much as I possibly can, I'm turning capital as efficiently as possible and am using it to the fullest.
This week I opened a new position slightly skewed to the downside on SPX. This ties with the Fed decision on Dec 16, so hopefully any downside is protected.
Executed an Iron Condor - 1985/1990 2130/2135 for 95c, on this particular trade I'll be happy with a small profit or even a scratch.

I read a few blogs of which 1 stands out describing with uncanny accuracy the stages of a trader.

Quoting Tony from Mexico

Stage 1:  You don't know what you don't know. And you start making trades and losing money, but you think you're the greatest piece of caca in the world.

Stage 2:  You're very excited about learning. Every time you learn something new, you use that new idea, and you think that idea is the holy grail. But you keep losing money.

Stage 3: You know a lot, you think you know everything, but you keep losing money and that's the most frustrating part. When you know that you know, but you can't make money consistently, and you keep making stupid mistakes.

Stage 4: Something clicks inside you, and focuses you, and you start consistently making money month in and month out. It's important not to give up on stages 1-3, because the payoff is huge if you can hold out during those tough times. And if you can't make money at stage 4, you can always find a job in fast food chain.

This is very poignant and like the Bible should be read over and over again to whip yourself to shape.(truth be told, the Bible isn't as interesting to me, i'd probably fall asleep after the first chapter)

I dislike placing trades when I don't tremble while placing them, it is a sign that you can control the ramifications of the unknown, very similar to chess.

I'm hoping that the Iron Condor expiring this week is a winner, releasing a much needed 2500$ in margin for further action next week, when premiums are higher, taking into account volatility before and after the Fed move, Draghi statements, pummeling of oil and commodities and strengthening of the dollar.
Update: The Iron Condor is a terrific winner I just closed it for 80% profit thereby releasing 2500$ of much needed margin!
Next week I will close the other 2 contracts which will release another 1000$ leaving me with a potential 7 contracts to play. (wing width is 5$ so 500$ of margin gets locked up for every 1 contract)

I've been thinking of other strategies along the following lines;
Once the account is healthy, I might continue the Iron Condor as a bread and butter play to keep getting credit and rotating capital, but I have to diversify.
Butterflies look interesting, but more interesting is another strategy I found.
It's basically a strangle but with a long OTM call or put as the case may be.
I am just not comfortable playing naked strangles on the SPX just yet, so I'll use this when I feel strongly on one side.
e.g. this is what it looks like for a pretty wide strangle play on SPX:
Very decent credit and offers protection albeit on 1 side but margin requirements are astronomical, so I'll pass for now.

So let's recap on risks and rewards of the popular strategies so far:

Iron Condor = High return on capital and high return on margin but low probability of profit. I sort of disagree with this because if you choose safe strikes then probability of profit is reasonably high.

Naked strategies i.e. Straddle and Strangles = Low return on capital but higher probability of profit. Remember profit can even be 1 $ and will fall in the same bucket. 

For that reason I think looking solely at probability of profit is misguided, yet it doesn't paint the best picture.
Probability of profit should be interpreted as "probability of reasonable potential profit" , another mouthful unfortunately, but hey if it helps make money who's mouth will hurt?

So lets complete the equation, a short strangle offers high POP, low ROC and low profit potential. After all you can certainly make 1$ profit on the trade but is that worth the risk?
Now let's look at an Iron Condor , this would be high ROC, low POP but high potential profit.

Thus higher the POP lower the potential profit.
Getting tired of this long post, Ill create another entry with some more thoughts on the matter.

Net cash 3827$.