Thank you and welcome.
1) I have a preset amount in my mind that I started with to use for the margin and it was a % of my total portfolio. That amount grows month to month as I make profits since the cash provides me more room to add more contracts. Right now I like spread positions to be about $100,000 or so. It is based on my capital and portfolio make-up so I would not recommend trying to copy it since you need to develop position sizes that best fits your own capital and risk management. I always like to keep "gunpowder" on the side so that I can jump in at any time I see an opportunity. I rarely like to have all my cash/margin maxed out at any time since it makes it harder to get into the next position.
This style of trading is not based on 1-2% of your portoflio in any one posiiton. I am not a big fan of that rule because it ignores the person's capital, risk tolerance and risk and trade management. My advice off the bat is make sure it is not 100% of your capital since we never want any one position to wipe us out. This strategy requires more cash committed then using simple call and puts or other strategies. I cannot tell you how much to use for these strategies if you choose to do them, but I can advise to use good risk management principles to make sure your capital is not all in one basket. If I take a loss on any position, even a max loss, it will not wipe out all my capital, or even 50% of my capital.
These strategies require some deep pockets and is not advised for a $5,000 account unless you are willing to commit all of it and can afford to lose it in worst case scenario. It is not cookie-cutter, so it takes some self analysis to determine what is most comfortable and for capital preservation and risk management based on your own style. SHort answer is that I do not have 100% in these strategies.
2) 9/11 is not a foreseeable event and I cannot hedge my positions against all things. Thankfully, after 9/11 the market took steps to ensure that it would not close. The week the market closed allowed for fear to build and thus the huge sell-off the first few days the market opened, which rebounded sharply over the next week or so after that. Since SPX are European style, early exericse is not a factor. Basically, I need to assess at the moment whether we have a London-bombing one-day blip or a systematic crash. In the latter, basically the best bet is to tale positions off the table on the put side quickly since IV will spike and buying puts as hedges will be as costly. I would close calls for profits if any existed and roll them down. I would also sell further OTM puts to take in more premium. The point would be to cut all losses as quickly as possible and minimize damages. I would take a loss but I would not be wiped out and I would make it back over the next few months.
It is about removing emotions from trading and I work everyday to keep my emotions out or make any emotional mistakes cost as little as possible. This is a business and it takes cold-hearted decisions to preserve your capital. If a major attack occurs, my first instincts are to cover my ass and get out where necessary and trade it. You should trade this day just like a mid-August low volume dead day. Easier said than done, but it is the skill which will save you a lot of money and make you a lot of money.
Phil
Quote from Gary Albers:
optioncoach, I really appreciate your forums! Thanks.
I have 2 topics I was hoping you could address:
1) Could walk through your thought process of determining the size of the positions you take. From what I can gather from your posts so far, you like to keep a great deal of your money committed as margin, with some held aside for adjustments.
I like that idea but I have not been able to correlate that thought with the typical recommendation of only putting 1-2% of your trading capital at risk on any one trade. That advice does not seem to fit this style of trading.
2) Could you walk through what your thoughts and actions might be on a morning like happened on 9-11-2001? For the sake of a specific example, lets say SPX is at 1220 with 4 weeks to expiration and you had the Sep 1150/1160 - 1265/1275 Iron Condor on. The news comes out and within 30 minutes the market is pushing down through 1180.
My trading plan/style is underdeveloped in this area of risk management and I would really appreciate some insight so that I can come up with some concrete ideas on how I will react.
Thanks again,
Gary
