March 18, 2009

Well I guess I could have opted for a couple more add-ons to the title, but then it would have ended up extra long and looking rather silly. I am holding off with the post continuing on with my discussion of the Greeks just for a day or two. Fact is I’ve broken some more rules .. and ignored some I’d covered earlier. Result .. not a good month! But .. fortunately still .. I am only paper trading. And .. I have learned once again .. how not to trade options.

Mistake No 1: I abandoned a multi-directional approach, preferring to just stick with the one type of spread .. the Iron Condor. The reason was because I was coming up with good starting positions, and having trouble getting the nice two peaks I wanted with Double Calendar spreads. Nothing wrong with Iron Condors but they are just a little less forgiving than Double Calendars. Rather than spread over 5 indexes I would have been better to have put my Iron Condors on just a couple until I’d got my head around the Double Calendars.

Mistake No 2: Greed!!! Rather than opt for a single position on each index, in some instances I opened with two or three. You know how it is. Just so any profit would be half way decent. Ha! Ha! Definitely not recommended when you start out. The problem is when you have to adjust (and in this market you do), that may mean you need to put another 3+ positions on each index in order to correct. And then later .. maybe a few more. Suddenly, you have exceeded your budget ending up with a higher margin than you intended. Ok .. so what .. if you are paper trading?  It makes sense does it not to simulate the real world scenario? Why would you have a margin of $10,000, when trading for real you would limit yourself to $6,000.  And .. then nearing expiry date you encounter something like the massive upswing we have seen in the market, which has seen me backed up against a fence, ill prepared to counter the late movement.

Mistake No 3: More greed!!! Hanging on in for that little bit more, when if I had exited a wee bit earlier things would have been quite different.

Mistake No 4: Settling for second best spread positions. By this I mean ‘so so’ spreads where the break even points were too close together, thus leaving little room to move. I made this mistake with two of the spreads I put on. The others were fine.

Mistake No 5:  Still not getting up to speed with ALL possible corrective measures.  That has meant I’ve been left in  a bit of a spot this last 3 days. And .. there are still a few more days to expiry.

So .. it is back to the drawing board and time to fire up those videos again. On the positive side I know just where my failings lie. The next step though is to not keep on repeating the same old practices, but to stick with the tried, true and tested formula for ensuring that one can learn how to trade options with confidence.

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