2018 Incident Report (Part 4)

Today I continue with an unfinished July 2019 draft evaluating my 2018 trading performance.

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Other considerations regarding the problematic strategy include:

• When to get the calls involved?
• Make some sort of checklist and record data daily. Take preventative action no matter what. Consider limiting position size so I always have some powder dry (have I been trading too large? Or keep trading this size but don’t change for a while). Checklist should have a number of items and the decision whether to take corrective action should depend on total checklist score (this will be too subjective for backtesting especially given limited number of occurrences of significant corrections per third paragraph here).
• When I roll, I’m starting at a much greater price (e.g. $12 – $14), which has a much higher delta. If the market continues to trend from that point, then those options quickly become $20 – $30. This makes me horribly uncomfortable. Until I find something better, exiting at first instance is a better choice than rolling.
• I want to test taking significant action on the biggest losses in X days. Looking over the whole set and making this decision is committing a future leak. However, plotting the difference across a range of X (e.g. 5 – 100 by increments of 5) or maybe a WF approach using largest in the last two months seems interesting [are both approaches the same? Even with a WF approach I have to figure a way to determine X].

With regard to my trading on Oct 24-25, 2018:

• I’d like to talk a bit about my trading mistake from Wednesday where I said to myself, “I’ll just go ahead and sell [harmlessly] an $8 call to recoup some of my losses.” When the market retraced half its huge Wednesday decline on Thursday, I felt horrible looking at a $20 call. I got little help from volatility despite VIX being down two points. A better way to approach this might be to look at the projected option price with the market retracing at least to the opening (high) price from Wednesday and to assess my risk tolerance. Another possibility is taking a 15-60-minute break from monitoring positions. While I risk seeing a horrifying DD when I return, I seem to pick the extreme in too many cases (e.g. closing the call on Thursday around 3 PM only to see SPX give back 10 of its 60 positive points into the close).
• I am not convinced TA is any better than 50/50. What it can do, though, is put some definition around what I’m doing such that my trades are consistent. Maybe I only go long (short) into an overbought RSI. Maybe I only go long (short) when I see a confirmed close above a previous candle’s high (low). At least this avoids me looking at the market, freaking out, and chasing only to watch (a short time later) my decision be proven horribly wrong after a reversal. This aligns with Goal #3 that I have discussed previously.
• It’s sloppy trading when I am forced to trade in fast-moving, wide markets and cave in huge amounts of money to get filled (especially when, two minutes later, I see the fill could have been had for a much better price).

I will continue next time.