Oil, oil everywhere Part II
When the iron condor trade in oil options futures was opened up a couple of weeks ago, I invited all to check in again closer to expiration to see how the trade developed; here we are.
Though there are still 42 days left to expiry, the options sold have lost 50% of their value and while this is a good position to be in (1st world problems!), caution is warranted. The reason is because while when opening the trade the risk was measured, and in my view of the oil market at the time, it was tilted in my favour as a premium seller, at this stage, with 50% of the premium having evaporated, the risk is now tilted the other way.
Lots of things can happen during the next 42 days and a better opportunity may be in a directional trade or none at all. Whilst my crystal ball is at the repair shop and I don't know what direction oil will take, what I do know is that it no longer makes sense to keep this trade as it stands. What I will do is simple:
1) I will take profits on 75% of my position and
2) Place a stop on the balance of the position to a point where even if I get stopped out, it will lead to a profit. At this stage the stopped will be moved manually and will eventually change to a trailing stop.
Behaving in this manner will keep me away from one of the top 'cardinal sins' of trading:
never allow a profit turn into a loss.
The position is now profitable and needs to be managed. The way I've chosen to manage this particular trade is by taking profits on most of the position. The remainder left on the table is to satisfy my "greed juices" with the stop protecting the position. The thing to understand about stop on options is, that they don't always work as designed, especially outside regular trading hours, but the position is sufficiently 'in the green' that it will be triggered profitably even if inaccurate.
The reason I am able to leave some 'chips on the table' is because my initial position was sufficiently large to allow me to do so, but that has to be balanced by the position not being too large that a move in the wrong direction would make a significant dent in the trad-able capital. Managing risk is partially about finding the right balance or as a clever man once said "it's the difference between being wrong or lucky".
Happy Trading!