The beauty of this strategy is that you do not necessarily need to sit on top of it all the time. If your strikes are 40 points OTM and the SPX is up 1.20 today, you gain nothing by checking the quotes every minute. You could even simply check in the morning and at the close at your leisure as long as you are sufficiently OTM. Naturally when the market starts moving closer to your strikes, some due diligence is required.
Contingent stop losses are not a good idea in my opinion. Now you can probably make a contingency such as if the index is within 15 points you close out your spread but I do not like that for two reasons. 1, if the contingency is hit, you may buy back your spread at a market order which, given the wide SPX b/a spreads, you will lose so much more money than if you did it manually. 2, I use the 10/15 points away from strike price as a warning signal and not an automatic adjustment. Sometimes if there is a short time to expiration and strong resistance or support I may decide to hold, or perhaps I have a partial hedge on and I am willing to wait longer. I think the personal touch is still required here when the index is closing in on your short strikes. Also, it may be better to simply roll down then to close out and take the large loss so the contingent stop loss is too simple an approach to limiting your risk and may result in greater losses than you really need to take.
Now as a tool for traders that have a hard time pulling the plug, I definitely say no. If you have a hard time pulling the plug then my advice is LEARN. Risk management is discipline and acting under pressure. If you have trouble pulling the trigger to make the risk management move, then you may not be ready to trade this strategy. THis goes for any type of trading. No matter what strategy you are using, you have to have the skill to pull the trigger on your plan no matter what because it will save you in the long run. A contingent stop loss is a false sense of security and only makes the problem worse. Instead of looking for the alternative to not being able to pull the trigger, I will tell you that you will make more money if you instead focus on learning how to pull that trigger. Best advice I can give you is work on that skill and contingent stop losses will not even be necessary. Nothing can ever take the place of personal risk management
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SO my advice is this strategy should only be traded if you have the discipline to stick with your risk management plans and pull the trigger. In September, despite strong resistance at 1245 and my 1250 strike, I pulled the trigger and adjusted when the index hit 1241. The index quickly reversed and went lower so in hindsight it was not needed but at the time I simply went into automatic and made the adjustment. Even closing out the put side and rolling them higher was automatic and even though I could not get the good price on the new higher strike puts to bring in more credit, I was still happy that I executed the trades as planned and still resulted in a profit.
Take the time now to develop those necessary skills and no matter what you trade your performance will improve. Once you develop your "Pull the Trigger" balls, you will trade with more confidence that even if the trade is moving against you, you will calmly make the right adjustment and stay on top of it.
Phil
Quote from Hart9000:
Coach,
I am looking into using contingent stop loss orders to exit these spread positions to cover my but during periods of time that I am unable to closely monitor the SPX. I also wonder if they would be effective as a risk managment tool for traders that have a hard time pulling the plug on trades entering a danger zone.
Do you have any thoughts as to the viability of this approach? I am particularly interested in the best method to structure these orders. Would you place the trigger at a set distance from the short strike or maybe at a distance from support or resistance levels of the index?
Thanks in advance for your comments.
