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Adjustments are everything, because prices fluctuate. That’s one inviolate rule of the market. Prices will fluctuate. We don’t care if they go up or down, but they do fluctuate. Once they get close to our breakevens, we have to adjust our position, so that we do not go into a losing position.
There are a couple of rules to the option markets. Those are the two I already told you. The third one is, “Don’t lose money.” The rules are: Prices fluctuate, options expire at a date in the future, and the third rule is, don’t lose money.
In order not to lose money, many times, we have to do adjustments to our original positions. This is where a lot of option players make a mistake. They do not adjust their positions. They put a position on, they believe they can just keep it on there until expiration, and then walk away from the position.
Well, they forgot about the other rule of the market, and that is, “Prices will fluctuate.” Yes, they do expire, and that’s where if you’re an option writer, or you’re doing credit spreads, you can make money. But what most people don’t realize, is that not only do options expire, but they also fluctuate.
If you get into a position, and a lot of option players do this – they just put positions on and they forget about them. They don’t even look at them until they have a loss. Then, it’s too late to do any type of adjustment to that position, because they’re already too far gone.
Our goal is to monitor your positions, and put these positions on within 30 to 40 days of expiration. Then we will show you exactly what you need to do in order to adjust the positions when prices fluctuate, to the point where you’re not going to be in an unprofitable position. That’s where the majority of the real profits come, in this business.
What happens to a business, when it’s not making money, all of a sudden? If we’re not making money, then we have to take a look at the source of the problem, and adjust our strategy in order to take advantage of new market conditions. That’s exactly what any business has to do.
Any business that is not in a profitable position has to take a look at their business model. Either they have to adjust their expenses, or they have to adjust their marketing and sales, or they have to cut back on expenses someplace. They have to adjust to current market conditions. That’s exactly what we do in our business of trading.
And that’s why it really is a business. We manage by numbers, and that’s what all good, big businesses do. They manage by numbers.
Now, this is an aggregate position of our demonstration account, for the purpose of these videos. You will see this throughout all the videos that we’re creating, on this strategy. We start out on a cash position. We normally trade maybe 3 contracts, 2 contracts, or 1 contract.
If you’re just starting out, we suggest that you trade in 1, 2, or 3 contracts, at the most, in these positions. The reason for that is it’s much easier to be calm, cool, and relaxed, if you do have to do an adjustment because the position is a losing position, and you need to make an adjustment in your position. You’re going to be a lot more relaxed if you have 1 or 2 or 3 contracts on, than if you had 10, 20, or 30 contracts on.
I also want to show you what the profit potential of having more contracts is. Eventually, as you get experience in this type of trading as a business, you’re going to have a great deal of confidence in your ability to adjust trades over time.
I suggest that you begin with paper trading. The Think or Swim platform has a paper trading account that you can set up for free. It looks identical to this. The only thing that is different is if you look up at the top left hand corner – this is a live trading account. It has a red symbol here, with the Think or Swim symbol or logo. If you have a paper trading account open, this is a green symbol.
The platform is absolutely identical. Everything is exactly the same. You can enter trades, you can adjust trades. You can look at charts, you can monitor your account. You can do everything in a paper trading account with Think or Swim that you can in this account.
Take a look down here, in the right hand corner. This is an aggregate graph, a picture. You’re going to find that these pictures are extremely important for us to monitor our trades. This is an aggregate position of our entire portfolio, of the four positions we have in the Diamonds, the EEM, the IWM, and the Spy positions.
This is what they all look like. If we were to monitor individual positions… For example, if we wanted to monitor our IWM position, all we’d have to do is enter the symbol in there. You can see that the graph looks almost identical, because we are still in all of our positions in a portfolio basis. If we went to a single symbol, that’s exactly what our current position in the IWM looks like.
We are not in the center of this position. We’re just a little bit off to the left. I think we have up-side potential. We’re going to maintain this position. If necessary, we will adjust it.
Let’s take a look at our EEM. Our EEM position, on the other hand, is looking very good. We’re exactly in the center of our position; exactly where we want to be.
In our Spy position, this is an iron condor. We’re exactly in the center of this position. A few days ago, we actually had to adjust this position. It would have taken a loss on this position, because it came very close to our breakeven, on a large market move. In our case, we actually made money. I’ll show you how that happened, in the adjustments CD.
Also, we’re going to take a look at our Diamond position. Our Diamond position is also looking very good. We’re almost in the center. We’re just slightly off to the side. We have a great deal of room. The Diamonds, remember, imitate the Dow Jones Industrial Average, so if the Diamonds are at 126.99, it’s pretty close to what the Dow Jones Industrial is, at 12,700.
If we take a look over here, the Dow Jones is actually at 12,714. What is important is the fact that it does mimic the Dow Jones industrial average.
If you take a look at this, you can see that at 12,700, in equivalent Dow Jones Industrial points, we have down-side break-even point of 12,300 or so, which is a 400-point move in the Dow Jones industrial. We have an up-side breakeven of 13,270. That means that we have close to a 500 point breakeven to the upside.