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Importance of Trade Record Keeping

Recently, I had a trader show me his options trades to evaluate and give him some feedback. As we looked through the pages of printed material from his brokerage company, I pointed out to him that his option trades did not have some very essential data: The price of the underlying at the entry and exit. Without those rudiments included in the record keeping, an evaluation is almost pointless.

Options are derivatives; they move based on the underlying’s price action. The premium also changes its value based on the increase or decrease in the implied (implicit) volatility. In order to be able to decrypt what took place, we had to pull the chart up and start locating the price during the trade for entry and exit. After locating the date on the chart, we were still lacking precision because his brokerage statement, like most, provided only the dates of his entries and exits. Without the specific times, we were forced to rely on his memory and his guessing whether it was the morning or afternoon.

Nevertheless, when the estimated price was approximately established, we still needed to be aware of whether the purchase and sell transactions were opening or closing. With options, a buy could mean two different things, and a sale could also mean two different things. I prefer to use the abbreviations BTC (Buy To Close) and BTO (Buy To Open), although I have seen the Market Makers and Floor Traders simplify it even more by stating BCC (Bought Call to Close) or BCO (Bought Call to Open). By using BTC and BTO, or for the sell side STO and STC, we are able to easily distinguish what took place on a certain date.

Finally, the question comes as to how to evaluate the exit on a multi-legged option strategy with entry. There are many different ways to do this, yet it is best to keep things simple. Even Albert Einstein said, ‘Everything should be made as simple as possible, but not simpler.’ Therefore, before anything else on your trade record, make sure to write down the following: Underlying price, date and time for the entry, and then in a separate column with the exit data. The figure below shows an imaginary option on XYZ that is trading at 74. The in-the-money (ITM) long 70 call has an intrinsic value of 4, and for simplicity’s sake, I kept the same number for the premium, although that is not reality; there is always also some extrinsic value. If the XYZ lifted 3 handles, the new premium should be higher in the amount of deltas, but in our imaginary case, XYZ went up 3 points higher and the long ITM call has gone up the same. Again, this is oversimplification. Record keeping is the focus of this lesson. To learn about Deltas in detail, please read, “Dutiful Delta and Gamut of Gammas.”

XYZ $74 Thu 1-12-2012 10:15 EST XYZ $ 77 Fri 1-13-2012 3:45 EST
BTO + 1 Mar (ITM) 70 c @ 4 STC – 1 Mar (ITM) 70 c @ 7
Figure 1: Single Option

Notice that in the above figure, the day was added as well as the date. Why would that be important? If one is trading weeklies, as I do, then the earliest I could get into them is Thursday morning right after the opening bell. After I get filled on my multi-legged spreads, I immediately place a GTC (Good ‘Til Cancel) order on my sold legs to close them for a nickel or less. When they will be executed really depends on the underlying price action. Having this GTC order in place right after the entry is part of my trading plan, and all of us have heard so many times that we should and must PLAN THE TRADE, TRADE THE PLAN. A picture (or figure) is worth a thousand words, so here is a multi-legged option record keeping sample.

XEO $ 592.84 Thurs 1-19-12 10AM
BTO + 11 Jan wkD 610c@ 0.40
STO – 11 Jan wkD 605c@ 0.95
STO – 11 Jan wkD 580p@ 1.50
BTO + 11 Jan wkD 575p@ 1.05
Maximum Profit = 1.00
Maximum Loss = 4.00
Break Even Points = >606, <579
Figure 2: Multi-legged option at Entry

Starting from the top and moving towards the bottom, the underlying is trading at $592.84 and all four legs are OTM (out-of-the-money). The weekly (fourth week in January) 610 call was bought to offset, or protect, the sold 605 call. The sold 580 put is insured by the long 575 put. The difference, or aggregate credit, equals 1.00, while a maintenance of 5 points (width of spread of either side/wing) has the total credit subtracted from it, so it comes down to 4.

The figure below shows the exiting information for the underlying and all of the options. Each horizontal line spells out the date, time and final outcome.

XEO $ 592.84 Thurs 1-19-12 10:05 AM XEO $ 592.84 Friday 1-27-12 4:00 PM
BTO + 11 Jan wkD 610c@ 0.40 Expired worthless
STO – 11 Jan wkD 605c@ 0.95 BTC @ 0.05 on 1-27-12
STO – 11 Jan wkD 580p@ 1.50 BTC @ 0.05 on 1-27-12
BTO + 11 Jan wkD 575p@ 1.05 Expired worthless
Maximum Profit = 1.00 Actual Profit = 0.90
Maximum Loss = 4.00
Breakeven Point = >606, <579
Figure 3: Multi-legged option at Exit

The last entry on the right is the actual profit as compared to what was predicted on the left side for Max P & Max L. Giving back two times 0.05 means that the overall profit was changed. In this case, we kept the commission out of the equation and the calculation is done per contract; it needs to be multiplied by the contract size, in this case by 11.

In conclusion, maintaining neat record keeping, rather than depending on a broker’s way of keeping trade records makes it so much easier to evaluate all of your trading action over the years. I also suggest keeping two separate boxes; one for losing and one for winning trades. The traders’ adage, Love your losers more than winners, means that the losing trades can teach a trader more valuable lessons than the winners. If you are using index cards as suggested in the Entries, Exits and Index Cards article, keep the back side of the index card blank for the lessons that would be learned and recorded from the finished trade. The front is for entry and back for the exit and lessons learned. Keep things simple and keep on trading.

– Josip Causic

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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