“Tell me, Mr. Anderson: What good is a phone call, if you’re unable to speak?”
– Agent Smith to Neo (Matrix, 1999)
You sat down with your mentor and came up with a custom-built system. Yours is a cashflow system, one that sells 45 DTE Condors against the RUT (Russel 2000 Index). It’s a winning system, back-, forward- and paper tested. It makes money in the long run and you are excited about it.
Halfway through the expiration, the RUT begins to threaten your short call. One of the rules you crafted together with your mentor stated: “Close the entire position if the price of the underlying asset touches the short strike.”
A few days later your short call is slightly ITM. According to the rules, you should close the Condor immediately.
But you don’t do it. Instead, you go check the RSI and find out that the index is overbought. You analyze the chart and recognize it’s extended to the upside. “I’ll be waiting for a pullback within a few days. That’ll do the trick.”
But there was never a pullback. The initial –$330 loss turned into a –$490 one. What are you going to do?
– Take the loss now, almost 50% worse? OR
– Wait until expiration to see if there will be any pullback and risk taking the max loss, –$845 loss (156% worse)?
— “Tell me, Mr. Trader: What good are rules, if you’re unable to follow them?”
Chart of the Day
Follow the Rules
(a fictitious example)
The chart above shows what can happen to your position if you don’t follow the system’s rules carefully crafted together with your mentor.
