Lately, I was reviewing our portfolio and analyzing what went wrong and why I no longer feel comfortable with it and with my trading.
It is something I struggle with – over trading.
So what I did wrong that put me out of my comfortable zone?
First, I set a wrong plan. I calculated that I could open one strangle contract every day as I misjudged the ability of my buying power to handle it. When I realized that it was wrong, it was too late.
Then I decided to stay in those trades as I wasn’t willing to take the loss. It still would be OK if I didn’t do my trade rolling the wrong way.
I rolled a trade (strangle) without waiting for the untouched side to close.
Today, when I have a strangle on, and one side gets touched, for example puts, I wait for the calls to get closed first. Once closed, then I roll the puts.
I haven’t done that this way.
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First, I treated all options structures as one trade through its life. For example, if I opened a jade lizard or strangle, I put a closing order on the entire structure. But if one side got in the money, the other side of the trade became worthless, but the trade didn’t close. I do not do this anymore. After I open a trade, I continue treating each trade as separate legs. It gives me a better flexibility to trade.
Second, once one leg of my options structure got in the money, out of fear of assignment I decided to roll that leg away and down (and out of the money) and I sold a new opposite leg against it to offset the cost. For example, if my puts got in the money, I rolled them away and sold new calls against it while I still held the old calls!
Without waiting for the old calls to get removed I started piling trades I didn’t want. The stock reversed rallied up hard and soon I had to roll the old calls and new calls higher. And to do so, I was selling new puts against it while I still had the old ones. I didn’t wait for the old to get rid off.
Can you see the flaw and a trap I got myself in?
Fortunately, I realized my mistake and started working on fixing the mess in our portfolio.
· January 2017 plan
My goal as a trader, for January 2017, will be to put the portfolio back on track with the allowed number of trades (a new calculation of allowed trades based on the risk and overall used and free buying power). This will be a long term goal as not all trades can be closed unless I start taking losses. And that is what I do not want. There fore we need to wait.
In the mean time, we have a few allowances in our buying power allowing us continued trading, we can trade additional trades to avoid staying idle. In January 2017 we will be reducing the number of additional allowed trades to 5 contracts (5 strangles) at a time (currently 6 contracts) as well as reducing the existing trades (existing 27 contracts – mostly strangles). New trades (contracts, strangles) can be added to the existing trades only if there is no impact on buying power (for example if we have 13 call contracts and 5 put contracts, adding 8 new put contracts is acceptable only if the new contracts will have no impact to the buying power).
This rule, however, reduces our trading ability making our trading more conservative (not in how aggressive the trade might be but how many of them we have open). For this reason, I do not expect to make $3,000 dollars premium income this month. I hope we will be able to make $1,500 dollars in January 2017.