Reducing the mistakes I make when trading Calendars

[zxcv64 771]

Over the years, I've made many mistakes when trading calendars - some really silly and basic ones, some I'm proud of, but most I'm ashamed to admit. Basically, I screwed-up often and consistently. So, one of the things I started to do to reduce this, was to actually keep a track of my mistakes.

 

Emotionally, it was very easy to just "overlook" the mistakes I made and move onto the next trade. I think this is called Avoidance or Denial. I did both. And I did them very well. But writing down my cock-ups was tough, because I was looking in the mirror and having to answer to myself. Not an easy task, as the ego would get in the way, but it was a task which I found immensely useful. 

 

Sometimes, in trading, as in many other things, simple and basic tweaks can have a significant impact on results. So, I created a simple page in my Excel journal, just for my errors. I display below the entry from Feb '21. It's nothing ground-breaking; it's simply a list of the types of mistakes I made, how often I made them and what stocks were involved. (This is just for Calendar trades.)

 

 

 

 

Just for clarity, the descriptions are as follows :

 

1. Not reading the Notes/Journal before trading.

I keep a journal not just for the trades I take, but I include a section where I describe what my experience was with that stock for that cycle. A summary, if you like. And the aim is to read the journal summary before I open a new trade the next cycle.

 

2. Buying too far from ATM

Self-explanatory. 

 

3. Looking over the cliff.

If I have a cal at say the 250 strike and the stock moves up to 260, then I'm still OK. The stock moves up to 265 a day later and I'm still kinda okay-ish. But I'm now getting close to the "tipping point" - any further rise in the stock price now will accelerate the loss in my cals, asymmetrically. By not taking action when the stock is at 265, I'm "looking over the cliff". Looking at large impending losses if the stock continues its upward trend and if I take no action (eg closing for B/E or small loss; opening a new leg at the higher stock price etc).

 

4. Under/Over-allocating.

Self-explanatory. One of the best practices in trading (I found) was proper position sizing.

 

5. Mon/Tue - not closing soon after market open.

This is a personal observation - if the T-0 was Mon or Tue, I found that my cals often fell in value as a day progressed. So, I felt it important for those situations to close early in the day.

 

6. Holding low-volume stocks till T-0

As mentioned in other posts, it's possible to get "stuck" with cals on T-0 where there is very little volume/OI. So, the aim for me, is to try and close them by T-1.

 

7. Not closing half at 30%.

Oh yes, good old fashioned Greed. A classic case in Feb '21 was AMZN - my cals were 30%+, but I held on - the next two days, the market shot up, AMZN moved a lot, IV fell sharply, and my cals were now showing a -5% loss. Nice. I had grabbed defeat from the jaws of victory.

 

8. Holding through earnings.

This is a cardinal sin which I committed many times by forgetting to close the trade on T-0. To get around this, nowadays, every time I enter a trade, I immediately put a 'Close' alert in my MS Office Calendar. 

 

As you can see, I made a total of 13 mistakes on my calendar trades in that month - that's waaaaay too large a number, and this resulted in me making a loss of the whole month - my first loss after 14 consecutive profitable months. Even just doing the basics right - eg. allocation - would have eliminated 3 mistakes. And closing the AMZN calendar for 30% profit, instead of -5% loss would have made a $$$ difference to my final returns.

 

This list is not definitive by any means - it's just my own personal list. Every trader will have their own one. And that list will be different for different types of trades (eg. straddles will have their own peculiarities).

 

I thought I would share the importance of keeping some sort of written records of the lessons learnt - it's not a sexy part of trading, and it's never easy admitting our mistakes (even to ourselves), but the more we can make trading mechanical, logical, mathematical and the less we make it emotional, egoistical and impulsive, the more chance we have of being profitable.

 

Happy trading!

 

 

 

Edited April 3, 2022 by zxcv64

[SureTrader 40]

Thank you for sharing your experience. The last paragraph is the vital part.

Can you share a bit more of your experiences regarding trading rules and psychology. SO mostly trades Pre-earnings calendars which are a different category due to high gamma resistance than regular calendars. I trade weekly double calendars with indices (SPX, NDX) with IV backwardation in front and back dated options. I feel this is the pre-defined "edge" in these calendars.

1. Rules to follow- Can you please share your trading rules. Do you scale up gradually or enter all at once. What if IV drops after you enter. My biggest obstacle has been timing the entries. As you hinted above the calendars drop in value as the day goes by, which means it better to sell at the beginning of the day (esp on T-0). Do you have any suggestions on entry times.

2. Do you have (hard) stop loss? If so, whats your criteria- gamma (price moved away from the profit tent) or IV drop or time left in the trade (waiting till T-X)

3. Hedging- Since calendars are short gamma, how do you hedge?- add another calendar (more short gamma) with the direction of the price movement? if so when? or add long gamma to counter short gamma such as call/ put or a vertical or a ratio trade

4. Do you follow 10% rule like SO does for allocation per trade. I have personally been starting with 10% and go up to 20% if I have to add capital to hedge.

5. Is it a good idea to scale up when the IV is dropping like the environment that we are in now. IV has been held up last 3 months due to market volatility which is now deflating like a balloon.

Thank you so much for starting this conversation. Always helps when experienced traders share their personal views and experiences.

[zxcv64 771]

4 hours ago, SureTrader said:

1. Rules to follow- Can you please share your trading rules. Do you scale up gradually or enter all at once. What if IV drops after you enter. My biggest obstacle has been timing the entries. As you hinted above the calendars drop in value as the day goes by, which means it better to sell at the beginning of the day (esp on T-0). Do you have any suggestions on entry times.

The most important trading rule is to ensure that the RV at entry is good. Normally, I look to enter if the RV is below the average, but will sometimes enter at a higher RV if the VIX is much higher than normal. I trade mainly the tried-and-tested cal candidates; if I find a new stock I will only commit  a small amount of capital as a trial.

 

Yes, I scale up gradually. I rarely enter the cal trade all at once. It's in drips and drabs - buying a few lots here, a few more there. (We, as individuals, have an advantage here over the official SO trades - we can buy a couple of contracts at the 510 strike, another 3 lots at the 500 strike, etc etc.) I often have multiple strikes, a combination of calls and put cals on the same stock. Eg for NFLX, GOOG, AMZN etc, I can often have cals on 5+ strikes. Closing some, opening some others, closing some more etc. It's a fluid thing.

 

Timing the entries - again it's mostly RV based, rather than time based - there's no particular day that's better than others. So, I have lots of orders open and sometimes none of them get filled, and sometimes I'm lucky and can buy something at a good price.

4 hours ago, SureTrader said:

2. Do you have (hard) stop loss? If so, whats your criteria- gamma (price moved away from the profit tent) or IV drop or time left in the trade (waiting till T-X)

Never had a hard-stop on calendars. The wide spreads, and wildly fluctuating mid-price on some of these can kick me out of a trade un-necessarily. On IB, I've often seen my cal show an unrealised  -20% loss and then a 10% profit a couple of hours later, because of the way TWS calculates the unrealised profit/loss.

 

My criteria if the stock moves too much is - "Can I close the current cal at B/E? or a small loss?" If Yes, then do so. If No, then consider opening a new cal at the new stock price (if RV still good). If I'm at T-1 or T-0, then I'll just take the loss and close. Adjustment (by opening a second cal) becomes less of an option the closer we get to T-0. Often though, I will start reducing the position size as I see the cal heading towards a loss. See above comment about have cals at multiple strikes and opening/closing cals fluidly.

 

4 hours ago, SureTrader said:

3. Hedging- Since calendars are short gamma, how do you hedge?- add another calendar (more short gamma) with the direction of the price movement? if so when? or add long gamma to counter short gamma such as call/ put or a vertical or a ratio trade

Other than opening a second cal, I don't hedge. I haven't added any put/call verticals - not that I don't agree with them, just that I haven't looked at the possibilities. I don't want to complicate the trade.

4 hours ago, SureTrader said:

4. Do you follow 10% rule like SO does for allocation per trade. I have personally been starting with 10% and go up to 20% if I have to add capital to hedge.

Yes, every time. I never exceed 10% on any one stock. It's temping, but a lot of red ink in the past has shown me the importance of position sizing.

4 hours ago, SureTrader said:

Is it a good idea to scale up when the IV is dropping like the environment that we are in now. IV has been held up last 3 months due to market volatility which is now deflating like a balloon.

Not sure what you mean my 'scaling up'. Right now, I have no cal trades open at all. But within a couple of weeks, a lot of stocks will have confirmed earnings and then I will be looking to enter - again the main thing is the cal RV. IV rises and falls in any medium level time period (say a month), and there is no way of knowing which way it will go. It doesn't prevent me entering cals. Also, with cals, as you know, it's the IV backwardation that's important - which is a fancy-shmacy way of saying "The main thing is not so much the IV, but the DIFFERENCE in the short IV and the long IV". The general market IV can fall, but if our short IV falls much more than our long IV, then we can still make a profit.

(I think falling IV is more of an issue for the straddle trades, where we don't have shorts.)

 

@SureTrader, all of this is for SO earnings calendar trades. You trade a lot of non-earnings/Index-based double cals. If you are happy to post your current/next trade on your thread (https://steadyoptions.com/forums/forum/topic/6757-weekly-double-calendars-on-indices-spx-ndx-djx/ ), then maybe we can discuss the specifics of dbl cals on there.

 

 

Edited April 3, 2022 by zxcv64

[SureTrader 40]

@zxcv64 Thanks for detailed explanations. I will post in the above link in the future about indices.

I agree that RV has been an invaluable metric for pre-eps trades. I wish there is some tool like that for indices as well 

Appreciate it much.