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Sunday, September 12, 2010

Stop Overtrading!

One of the most difficult stuffs when dealing with neutral strategies is, believe it or not, to avoid over trading, avoid over adjusting your positions.

Set some ground rules from the beginning and stick to them. For example in the trade I analyzed yesterday, if our downside break even point ($176.83) is threatened I would adjust. But what is the meaning of "threatened" here? Well, that's when your personal flavor comes in. For me, I said to myself, if XAU goes down to $178.50, I will close the Puts side of the trade:

+ 10 OCT 175 PUT
- 10 OCT 180 PUT

- 10 OCT 192.5 CALL
+ 10 OCT 197.5 CALL

In order to close it we just buy the 10 OCT 180 Put that we had sold, and sell the 10 OCT 175 PUT that we had bought. An in addition to that I would sell another vertical at lower prices. For example I would consider selling 10 OCT 172.5 PUT and buying 10 OCT 167.5 PUT. As a result I would end up having an Iron Condor again but with a wider profitability range, and a lower downside break even point.

+ 10 OCT 167.5 PUT
- 10 OCT 172.5 PUT
- 10 OCT 192.5 CALL
+ 10 OCT 197.5 CAL;

The only problem is that my potential return decreases, because the credit received when opening the second vertical is probably going to be less than the original vertical sold on that side, because now expiration is closer and the options must have less time value. The other issue here is that I also lost money to commissions for doing the trade. So, avoid over trading! Set your rules from the beginning, and don't start adjusting until your initial conditions to apply the rules are met.

I stumbled on an article this morning about this subject. It does not talk about delta neutral, bullish or bearish strategies, but just about the "over trading" sickness.
Here you are
Have fun !

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