Andy:
After I responded in my previous post, I decided to look at the actual numbers for that month in my diary [enough time has passed
].
Unfortunately, my diary is a little muddled over that time period, so I'm not sure where the SPX actually was, but I know it was at least ATM and possibly somewhat ITM.
So here's what happened:
I adjusted a bull put spread as a result of the London bombing. Following the adjustment strategy I rolled down my call spread with a little over a week to expiration. This is what got me into trouble because the SPX slingshotted back up after the bombing.
7/7/05: BTO 1210/1225 bear call for $0.90
7/11/05 STC 1210/1225 bear call for $6.80
7/11/05 BTO 1215/1230 bear call for $2.75
Several hours later I closed the 1215/1230 as the SPX had jumped again.
7/11/05 STC 1215/1230 bear call for $4.50
In this case, rolling out 5 points did nothing for me except compound my losses. Of course, in hindsight, I should have gotten out, but besides the extreme stress, I had never lost money on a credit spread and my mindset was I didn't want to.
So, if you've been wondering why I question 5 point rolldowns and hanging on when your short strike is less than 5 points away from the SPX price, I think you can see why. Frankly, IMHO, it wouldn't have taken much yesterday to breach 1165.
Still you and Coach were right. One big difference is that you two can probably afford to lose money (as you said you were prepared for a 15% loss). I can't because I'm negative now as a result of this fiasco. My goal is "nickels and dimes a thousand times" and to just continue to stay in the game.
One other thing, I'm not a particularly touchy/feely person (hell, I don't even know the words to Kumbaya), but being a member of this forum has certainly helped in recovering and getting back on track [plus, even if we all lose money, misery loves company
]
Quote from rdemyan:
Andy:
I wish I could give you a well-thought out answer. At the time I was under extreme stress as I allowed this to go on over a weekend. By Monday, I got out at all costs and even though I lost quite a bit, it wasn't the worst case scenario, I was immensely relieved. Still it had a drastic effect on my subsequent trading. I was jumpy and pulled the trigger early on adjusting August positions and needlessly gave up premium that month (I probably should have spent a month recouping emotionally).
The one thing I really remember is that once you get at around ATM, it seems like the cost to get out has gone up exponentially and any amount you can get from rolling even 5 points is miniscule compared to what it costs to get out with an ATM short strike on the spread. Of course this is not unexpected, but it never really hit home until I experienced it. The other thing is that the stress is much higher than what we experienced this month, so you don't think nearly as clearly and the odds of making stupid mistakes increases. Also, I was on my own and I know that if I had asked for help in a forum such as this, I could have reduced my losses.
Further, as Coach has just posted I was a victim of my own success in previous months and had too much margin allocated to credit spreads.
