17. Managing greed
2 weeks ago, I had a losing trade. The market crashed and I moved out my contract because I didn’t want to risk assignment. In my case, moving out those trades when volatility was high helped me gain more premium (in exchange for more risk). The original trade itself was only worth $2.70, but after rolling a couple times, I now collected $18.60.
This morning, the contract was due to expire. I could have closed out my contract at $1.15, capturing $17.45 of premium ($18.60 total premium - $1.15 cost of closing). I had another trade that was worth $16.10 that I could have closed for $1.75, capturing $14.35 premium...But I waited. The market was going up and I knew if it kept trending, I could get out at a lower cost. What a mistake. After trending upward, the market started to decline. I had 3 options
Roll out the contracts again to capture more premium. This would be a bad idea if the market kept trending downwards.
Hold onto contract, hoping the market will go up. I would be in trouble if the market kept dropping.
Close contract out at the current market price...I can afford this and still get out with some premium. Just not as much premium as this morning.
So....I got out, closing the contracts at $6.80 and $9.80, I received a profit of $11.80 and $6.30 for the contracts. In total I made $18.10 instead of $31.80.
At the end of the day, I made much more premium than I thought I would, when I originally got into these trades at $2.70 so I should be happy I made the profit I did. I am...but I have a little bit of remorse having left money on the table.
When you have to adjust your trade, you really aren’t trying to capture the additional premium, you’re just trying to buy yourself more time so you can get out break even.
Takeaway: Manage my emotions and greed. In order to avoid getting wiped out, take small or no gains over additional risk.