Well, well, well… When the market closed today I was a happy man. I walked away 100% profitable on my personal trades and the RUT papermoney trade that was stopped out proves the point that you MUST follow the rules! For the record, I’ll state my rules again.

• If the underlying trades to within 10 points of my inside strikes with more than 2 weeks to expiration, I’m out.
• If the underlying trades to within 5 points of my inside strikes with less than 2 weeks to expiration, I’m out.
• If the underlying trades to within 5-10 points of my inside strikes in the last few days before expiration, I’ll evaluate and possibly exit pending market movement – see above rule for 5 points or below.
• Note: you should make and follow your own set of rules. Your personal rules should reflect your personal risk tolerance. Feel free to use mine, they work pretty well for me

So, with those rules in hand I closed the RUT papermoney trade when the Russell traded below 725 on Wednesday. Closing a possible winner for a loss is a skill that you must learn if you want to make any real money in the market. It is critical that you listen to the numbers not the, oh I might make it thoughts… My personal feelings were that the RUT would recover and the position would be fine, but I wasn’t about to break the rules and risk $25K (even if it is fake money!) on a hunch.

As promised, here is the breakdown for what would have happened if one was to break the rules

• If you kept the trade open…
• Today would have been a bad day
• The Russell Settlement, or RLS, was 717.19, that is a full $2.81 lower than the inside strike of the Iron Condor
• We were short 25 contracts, and would have had to settle up for a full $7,025, plus about $50 in commissions
• This cost of about $7,075 is about $1,465 more than we paid to close the position on Wednesday
• So by following the rules, we saved about $1,465 – not to shabby.

I don’t know what your personal bank account size is, but I don’t like losing any money! Saving $1,465 or so is a great move in my mind, and I think it really speaks to the importance of having a set of rules and following them! Of course, the market could have bounced and we would have closed out early and taken a loss when we didn’t need to, but it didn’t! That is why the rules are there, because trading on emotion = losing money!

Categories: Options Trading, Papermoney