What follows is a stream-of-consciousness brainstorm about minding a model:
I need to shift my focus away from attempting to create a strategy, or system, or whatever you want to call it that is a slave to hard and immutable rules.
In theory, I believe in the whole idea of “if x happens do y, or if a happens then do b.” I do believe that would work for most Traders most of the time — assuming the rules were in service of a strategy that had some kind of monetizable edge.
But I think where I’ve always gotten myself in trouble with my Index Options trading is that I’ve tried to be too rigid with my rules making. I’ve tried to come up with firm rules that must.be.followed.at.all.cost.no.matter.what. And then when the market moves in a way that makes me uncomfortable, I begin to have a minor freakout moment where I trick myself into thinking my “rules” are all wrong and I’m an idiot for having thought of them in the first place.
This, of course, then leads me to abandoning my rules at the worst possible time, which then results in impulsive trading and a whole lot of “coulda, woulda, shoulda” regrets.
And then it’s back to square one. Wash. Rinse. Repeat.
I need to be putting my energy and focus on solidifying an overriding mission. A set of First Principles that inform every decision that comes after it.
So what are my First Principles when it comes to my Index Options trading?
- I want every trading day to end cashflow-positive. Meaning: I want to end each trading day with more cash in my account than I started the day with. This doesn’t mean I earned postive PnL. I can’t control what the market gives me. But I can control my cashflow and that is the focus.
- I will achieve the above bullet by maintaining a position comprised of out-of-the-money call and put credit spreads. And I will close these spreads when they don’t have much more to give (take profits), or when they grow to carry too much gamma risk (close losers).
I must allow myself flexibility, patience, and grace to operate in any way I see that fits the current moment, as long as it operates within the constraints of and serves these principles. If I’m taking action that does not serve these principles, then I need to take a step back and ask: why not?
What works today might not work tomorrow. The appropriate action to take today might be a completely irresponsible concept next week. As the market changes, I need to adapt to it.
There are a lot of ways to successfully achieve these First Principles — especially as it pertains to what triggers entries and exits, the timing of adjustments, and the initiation of new credit spreads. There is no perfection here. There is no right answer that will satisfy every situation. I need to forget about that “coulda, woulda, shouldas” and take comfort in knowing I executed well when my discretionary choices were in service of my First Principles.
This is the PnL graph of my SPX options position as of today’s close. The green flag shows where SPX closed (prices on the x-axis). This is a close approximation of what my position should look like at the end of most trading days while following these principles:
I guess I could these First Principles my “Trading Model” ?
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