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July 22, 2012 / redman59

Sometimes You Got to Ask Yourself…

When coming into a day of a news event, such as NFP, or just any day other day when you find your portfolio over-weighted to one side being bull, bear, or industry you have to ask yourself:

“Can I sleep tonight”

Through my experience I have found that when I feel uneasy it has been best to reduce that risk or take off the position. Do I always follow this advice…no, and it has been damaging almost every time. A recent case of my stubbornness that cost me can be found in a recent post titled An Addiction I Am Trying To Control.

Basically this post talked about how I closed positions but then put more positions on as I felt I had to do something. Even though they compromised a small part of the portfolio I didn’t feel so great about them later that day. The two positions that I didn’t like were a SPX Bull Put Spread and a /ZB Bear Call Spread. I ended up closing & taking a -$75 loss on the /ZB trade, so nothing huge and that same trade is now severely underwater by about 3x that. But the trade that did more mental damage than anything is the SPX trade.

I sold the 1310/1305 Put Spread for a $35 credit, risking $465 with the SPX trading at 1339. In order for me to have a loss this trade would have to close below 1310 or a 29 point drop by Friday morning (2 full trading days). Could it happen..yes but I went into the trade believing that two more 15 point drops after the selling we already had seemed unlikely. Well Murphy took the markets and he was out to get me. I wrote a follow up about the trade titled A Note on Risk and Following Some Simple Advice to Save Some Money that has more details. The chart below shows the gist of the trade on a 15min time period.

I went back and learned what I did wrong and found I did mess up the entry based on the rules as I was in too much of hurry to get in the trade and I didn’t want to miss it. I also disregarded my adjustment/exit level and didn’t take the smaller loss when I knew I was wrong. Learning from my mistake, I put the trade on again this week Wednesday with the 1280/1275 Bull Put Spread for a 0.35 credit.

I put the trade on when it was ready and recognized my risk parameters & adjustment levels. I was going to keep the trade on into tomorrow as a 30pt SPX drop by close of Friday seemed unlikely but I asked myself “Would I sleep better if I just removed the trade”. My answer was yes as we have data coming out overnight and pre-market and I ended up placing a limit order at 0.10 and was filled later in the day (which was near the high of the day) for +$25 per spread.

As soon as I was filled there was the relief of not having the big risk going into tomorrow morning and hoping for a move to the upside or not a big move to the downside by end of day Friday. I am confident that we won’t have a 30pt drop but I also don’t want to take any chance and I was happy with the profit. Murphy has kicked my ass too many times and now I can have a good relaxing Friday with mind at ease.

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