MidwayTrades

This year has been a very good year so far. I've seen some traders get frustrated with 2025 and 2026 because this has not been a normal market. Things are moving back and forth many times against a lot of conventional wisdom. We've got another tech bubble going on due to the AI craze, interest rates, while not historically high, have been held high based on the last couple of decades yet we keep hitting all time highs. And, of course, there's chaos in the middle east wreaking havoc with oil prices with news reports all over the place that is moving the market. Yet, in all of this chaos, it is possible to make money trading this market. Keep in mind that I primarily trade SPX in a non-directional manner so much of what I discuss here will be in that context. But some of these idea may help you in your trading regardless. I made most of these changes mid-2025 and by August I started seeing some results which have continued so far into 2026. I'll have my fist half of 2026 review in a few weeks right here on the site. The early part of 2025 was an absolute mess and that made me really look at what I was doing and think about what changes I had to make. This is why I do all of these trade reviews, both with the weekly videos and the half year reviews here on the blog. But enough of that, let's talk about the changes I made and why I think they are working.

I Changed The Way I Look at IV (VIX)

Because I'm an SPX trader, VIX is a reasonable proxy for the IV of the index. I use it as tool to determine what kind of trade I want to enter. When VIX is low, I tend to go long Vega (think calendars, diagonals) and when it's high I like to be short Vega (think Butterflies, which I prefer to Iron Condors.). I believe that IV is mean reverting so it makes sense to be a contrarian, especially when it's particularly high or low. I had levels that I used for years. Generally if VIX was below 16, I liked long Vega and above 17 I liked short Vega. In the middle was a trader's choice. But, as I said, in the first half of 2025 my trades just weren't working. And so I had to look at what I was putting on and I realized that the market had changed and the VIX levels I was using didn't make much sense. Take a look at this 2 year chart of VIX:

I know this image is a bit hard to read but the black bar across the image is VIX at 17 which is the point I'm trying to make. During the past 2 years, 17 is actually a low IV environment for SPX and so instead of being short Vega, I realized that being long Vega made more sense. Now I'll be long Vega until around a VIX of 24 or higher. Making this change helped me position myself with respect to IV much better and made my trading easier.

Since discovering that I regularly check VIX over a 6-12 month period to determine my levels. It's quite possible that the range will change again at some point and I need to watch for that change so I can change my initial trades accordingly.

Don't Be Afraid To Take Early Profits

With the market moving around in bigger chunks than before, there's nothing wrong with taking a profits early when the market offers them. In my early trading days I really held out to get at least 10% of my original risk on a trade. Today, I still get that sometimes, but I'm perfectly happy taking 8%, sometimes even less depending on the conditions such as:

• Time in the trade. If I can get 6 or 7 % in a day, I'm taking it. If I'm over 50% of the time in the trade, I likely just want to get out and move on.
  
• Known events. If there's a major market event (think CPI, FOMC, or a big earnings like NVDA), there's nothing wrong with taking a trade off before the event and re-entering after.
  
• At an Adjustment Point. More on adjusting later but, for now, if I'm at an adjustment point and I'm up any money at all, I just take it and move on. Sometimes I'll put on the same trade re-positioned based on the move.

Of course, you should try to make the risk worth the reward and sometimes staying in makes sense, especially if your Greeks are good and you are well positioned within the range. But, especially in strange moving markets, you can make good money with several small wins rather than trying to fight a trade to get a big win.

Keeping My Delta and Gamma Low

This came out of my end of year review of 2025 when I saw things getting better. What I realized is that, for me, around 3 weeks is a sweet spot for an initial entry into a trade. That doesn't mean I'm in the trade that long, I'm usually out in a week or less, but my most successful trades were around 3 weeks of initial duration. Why? Low Deltas and Gamma. When things start to move, having a low Delta and Gamma gives me time to react or gives me the patience to wait for a reversal. If I have a 4-lot calendar on (a very common trade for me these days), having less than 1 delta and 1 or 2 cents of gamma at the start of my trade has helped me ride of moves in the first couple of days in my trade when they are most vulnerable to big moves. When I was trading shorter term, one decent move in either direction and I would need to adjust only to watch is reverse and whipsaw me. Whipsaws can still happen, to be sure, but it's easier to be patient when the trade is 2% down with 2 deltas on a 4-lot, than 9% down with 5+ deltas on the same trade. I've coined the phrase “low deltas = low blood pressure”. In a market that is moving big on news events, having time in the trade is a great tool that everyone can do. Now if you're really good at 0DTE or other really short term trades, more power to you. But I have found, for me, that having some duration has made the way I trade more successful. That short term Theta looks really nice. But it typically comes with a lot of price risk. I prefer a bit more time.

Incremental Adjusting

This has been a game changer for me. When reviewing trades in the past I noticed that most of my unsuccessful or just bad trades all had one thing in common. Over-adjusting. In fact, I had a rule that I never wanted to adjust more than once in a day. And while I still rarely do that, I have since decided that I drew the wrong conclusion from that data. It wasn't as much the number of adjustments as it was the size of the adjustments I was making. I would crush my position Delta or, many times, reverse it. And that's fine as long as the market keeps moving in that direction. But when it would reverse I was right back in trouble and needed to back out the adjustment. I was, essentially chasing the market.

So mid last year I started making smaller adjustments. My main focus when adjusting is on the position deltas, namely, I want to reduce them (in absolute terms, I want to get closer to zero). What I found is that it's ok to do a small adjustment and then wait and see what the market does, then adjust more only if needed. Many years ago this would be expensive because brokers would charge you a fee per transaction plus commissions. That practice is, thankfully, long gone and so doing 2 small adjustments doesn't cost more than doing the equivalent move in one larger adjustment. I'll walk through a recent example.

Back on April 9th I opened a 4-lot calendar about 25 points under the money at 6800 in the calls. The shorts were 22 days to expiration and the longs were 4 days later. VIX was about 19.58 when I entered it. So right now you can see I'm applying multiple principles here. I'm willing to be long Vega at this VIX level and I'm starting about 3 weeks out. This makes my starting position delta 0.55 on a 4-lot with 0.03 short gamma.

A few days later on April 14, we've been moving up and I'm approaching the high end of the calendar tent. At this point I'm around 4% down in the trade and my position delta is about 2.80 short.

Note, this is about 12:30 in the afternoon (US Eastern time) so there's still a good bit of trading left to do today but I don't feel comfortable with this risk. Before I would add 4 calendars to the top to turn it into a balanced double calendar or, if I didn't want to add that much capital I would roll 2 of them up. But both of those trades at this point would really skew my position delta, remember I'm only about 2.8 short. So, instead I add 1 calendar at 7025C.

This adds decent room to the upside tent, but only cuts my position deltas down to about 1.75 short while adding about $500 to the trade. Now I have slowed down the bleeding on the upside but I still have some short delta if SPX reverses.

And the very next day, SPX is up almost another standard deviation to 7012 (remember I entered this trade when SPX was 6825 so this has been a decent move) and my trade now looks like this at around 2:40.

Would a bigger adjustment been better? Probably, but there's no way to know that, but I did make it better on the trade by cutting the position delta the day before. But now the delta is 3.38 short and the P/L isn't changed that much. But I'm about 15 points away from the center of the other calendar. The way I used to trade I would wait until SPX breached the center of the upper calendar, but that would require a bigger adjustment and I like being able to adjust earlier to just lower my delta risk. So in this case, I sold off 3 of the lower calendars leaving just a 1-lot double calendar. My thought at the time was that this would be the first step to exiting the trade as I didn't like it as much but by incrementally adjusting I gave myself some flexibility.

So now I have drastically cut my overall risk from $3400 down to $1400 and my position delta is now 0.44 short. Like I said above, I didn't like how the trade was going so I wanted to take some risk off the table all around and, possibly just take it off at near break even or even a loss.

Later that same day, around 3:25, SPX basically hit the center of my upper calendar. My position deltas were still pretty low but I was still thinking about taking it down, but the more I looked at it, the more I started to think it wasn't as bad as I thought. So instead of taking it down, I rolled the lower calendars at 6800C to strikes of the upper calendars at 7025C. So it went from this:

To this:

I basically reset the trade as a 2-lot calendar centered at 7025C. I did, technically, flip the sign on the position deltas which I usually don't do but it was pretty small anyway so I ended up with 0.80 long delta on a 2-lot. You might consider this just starting over and that's fine. I considered this a continuation of the original trade.

The market calmed down a bit after this (finally!) so I rode this out for a couple more days and on April 20 at around 3:30 I took off the calendars for about 6% of my original capital.

Now, is this the cure all for adjusting? Absolutely not. It is possible to over-adjust incrementally as well, but it is a tool and a mindset that has helped me handle trades that require adjusting better. Do I still take losses? Of course, but I'm avoiding bad losses by not over-adjusting and chasing trades.

Note that in this example, I used all 4 of these changes: I entered a long Vega trade when VIX was 19.5, I didn't hold out for 10%, or even 8%, I kept my position delta and gamma low, when adjustments were needed, I did small incremental adjustments.

I hope some of this helps you in your trading. So much of trading is a mindset and sometimes our mindset needs to change as market conditions change. The early part of 2025 was not a fun time for my trading. But what made it worth it was that I came out of it better.

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Bouncing Back

2025 started pretty rough, which you can see by looking at my first half review, but the 2nd half was, overall, much better and I did bounce back quite a bit. Here's a quick look at each month of 2025:

So, you can see I worked my way back to profitability for the year with only 1 bad month (December) which was driven by one bad trade. Sadly, that's how trading can go and I need to continue to work to minimize those in order to reach my goals. Speaking of goal, while I did better than last year where I barely broke even I came in at only 13% of my goal. To be fair, the goal is quite ambitious and getting even 75% of that goal would be a very successful year, this year did not meet my standards. That being said I did have some lessons that I will speak to later.

I won 82% of my trades in the 2nd half of 2025, which was a big improvement over the 63% in the 1st half. This brought my final win rate to 74% which is a bit under what I would expect given my style of trading. But, given the mess that was the first half, I'm ok with where I ended up on that front. The real area for improvement is, once again, keeping my losses under control. I had 2 bad losses in the 2nd half in total which lead to a draw down of $2,100. The other losses were reasonable. Cut that down to a more reasonable level of, say $850 and I made 30% of goal which given the first half would have been very good. This is why the size of losses is so important. A win rate of 74% looks great, but it matters how big the losses are compared to the wins.

More Visualizations

Next, let's look at the usual visualizations to see if anything stands out. I'll start with trade types:

Obviously, calendars were the trade for the later half of the year, but this had more to do with the fact that I did so many more of them as implied volatility was lower than the first half and I traded much more long vega trades. The one speculative trade was a small earnings play in COST. I rarely do earnings plays and this is why...I'm not good at picking direction. I might do one again, but it will be rare.

Next, let's look at days to expiration:

Overall all my DTEs worked ok. The 22-day stat is skewed a bit with the big loss at the end of the year. Most of my trades were between 18 and 24 days and that is where I am most comfortable. I decided at the end of last year to do fewer shorter term trades and I followed through with that in 2025.

Next up, days in trade:

Again, this chart is skewed by the big loss at the end of the year. That being said, 10 days and less is the real sweet spot for my style of trading. At 10 days, I need to put the trade on a short leash.

The Big Lesson

One big change I made in my trading style in the 2nd half is what I like to call incremental adjusting. I should do a separate blog on this at some point. The idea is to be bit more aggressive on when I adjust but less aggressive on how much I adjust a trade. In the past I would wait longer and adjust more. That can work, but it made my trades more vulnerable to whipsaws which lead to more losses. By adjusting smaller, I was less affected by a wilder back and forth market and I think it really helped. It's not perfect, as the big loss in December proved...but I plan to continue this method of adjusting into 2026 while being open to tweaking it as I learn more.

Conclusion

Overall, I am pleased with the 2nd half of 2025. Incremental adjusting along with being more flexible with VIX levels in the choice of my trades made me a better trader. I still have a ways to go, but the goal is to keep getting better which I think I did. This is a long journey of learning...probably longer for me than many people. My hope is that sharing my journey will help others as well as myself.

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This is a quick video covering an important risk management event that I call a fire drill. With Powell speaking a Jackson Hole tomorrow morning, there's a chance that we have a decent move in the markets. While I do this every day, I think it's particularly important to do this before market events like this. The idea here is to show my methodology to help newer traders with risk management.

Watch the Video

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Recovering From a Rough April

2025 started out as a challenging year for my trading. I had 2 bad months, one particularly bad, and the rest I didn't make my goal. But I did end stronger and am on my back to break even.

April was particularly rough. To be fair, the market was a bit crazy as that's when all of the tariff stuff started in the US but, as a trader, I have to be able to trade the market properly regardless of conditions. On the plus side, I followed up April with 3 straight months (4 if you count July) of net gains so I got back on track and am trading much better.

Overall I won 63% of my trades which is below my normal win rate which is more like 75%. This was mostly due to a very rough start. But only 2 of those losses were particularly bad. Losses happen, but not all losses are created equal. My rule of thumb is that a loss should not take out more than 2 wins. Not to my surprise, both of those bad losses were in April. So, it's safe to say, that April messed up the first half of the year.

More Visualizations

Let's see what else I can learn from my trading over the first half of the year.

First, let's look at the types of trades as this is interesting:

Calendars worked much better than butterflies. Lots of volatility likely explains that. Even now, I'm trading calendars almost exclusively. Something happened with IV that took me a while to notice. It moved to a higher range than in previous years. Normally, I would consider 16.5+ in the VIX to be a high volatility environment and would deploy short vega trades like butterflies. But with the chaos of the world this year, a 16 VIX is low IV. Take a look at VIX over the first 6 months of the year:

The low end of that range is around 16. Now, I would start looking at going short vega somewhere between 20 and 25. Figuring this out changed my trade choices and, consequently, improved my results. The lesson for me here is to not rely the markets of the past. Pay more attention to the recent market and trade accordingly.

Next, let's look at the days to expiration.

The sweet spot continues to be around 3 weeks out. Note that this is also where I tend to put my calendars while my flies were out closer to 30 days. So this may be a bit skewed by the trade choice. But it still tells me that calendars around 3 weeks is a good place for me.

As far as days in trade:

Staying in a trade for more than a week was dangerous. I think this is also skewed a bit by trade choice but, overall, the being in a trade for a shorter amount of time is usually better for me. If I'm staying in for a long time, it usually means I'm adjusting which, in and of itself, isn't bad, but it indicates that the market moved against me so it will be more difficult.

Conclusions

While the first half of 2025 was challenging, it made me better overall. The big lesson around paying more attention to recent IV should serve me well moving forward. Had I realized that sooner, I may have been able to avoid some bad situations. But that's what this journey is about...learning. I hope you learned something as well.

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This year has been challenging for trading, specifically for range bound traders like myself. The market has been moving a lot on news from the US administration on things like tariffs. Some of these moves have been very large and very quick in either direction. How can a trader respond to these types of unexpected moves? One solution is to sit things out until things calm down. But there should be a way to try and make some money in this type of market without resorting to guessing direction. I've been thinking about this a lot lately and want to share my approach to risk management in a highly volatile market.

First and foremost, I use the first and most important risk management tool: size. This is something everyone can use, regardless of skill level. When markets are volatile, reduce the size of the trades and, thus, the amount of risk on the table. It's a very simple idea, but one that is very easy to forget.

Now to the main part of this post. How do I tweak my risk management to minimize the damage of big market swings? To do this, I rely heavily on the Greeks, most importantly the price risk Greeks, delta and gamma. Gamma is the easier one as it doesn't come into play until around expiration week so if you can go out in time, you can minimize gamma. Delta requires more work. I have made some tweaks to my risk management plan that tries to minimize my position deltas and, therefore, my price risk. Is it perfect? No. There will always be some kind of move that can mess up your trade but the goal, in that case, is to minimize the damage to the trade and, ultimately, to the account. I watch my position deltas very closely and make smaller adjustments to keep them in line as much as possible. It doesn't always turn a loser into a winner (although sometimes it does), but it can turn a very bad loser into an acceptable loser which, to me, is just as important.

As usual, I will provide a real world example in SPX. The idea here is to learn. This trade was not profitable but I want to show how it's possible to rescue a trade that gets caught in a fast moving market. This is very recent trade that started on April 22, 2025 and ran for almost 30 days which is as very long time for my trades. But I went out that far to lower my price risk. When I put on this trade, the VIX was 30.96, which is definitely on the high end of the normal range. So I decided to put on a balanced butterfly. Why? I wanted to be short Vega since IV was high and when IV is high and butterflies are short Vega. I chose a balanced butterfly because when IV is high, they tend to have very low initial position deltas then when IV is lower. This meets my risk requirements of being an IV contrarian as well as keeping my deltas as flat as practical.

I centered this trade about 35 point above the money. Why? The greeks. This trade has -1.43 deltas on a 3-lot which is quite flat. The short deltas will benefit this trade on the downside, and the 35 point cushion away from the money gives it room to run on the upside so that I should have time to react if we go up quickly (SPX was up 106 points on this day). The only bad thing for this trade would be a large move up....and that's exactly what happened.

SPX opened up another 141 points. This trade now looks blown out. One response could be to just close it for, probably around a 20% loss. But I chose to try and manage it. The one thing this trade has going for it is time..this is literally the first full day in the trade. So I look at my trade and my goal is to do 2 things: widen my profitable tent and lower my position deltas. By the time I was ready to adjust (I waited almost an hour to see if there would be a pull back) my position deltas were about -2.96 which isn't bad, but any adjustment I do will not want to increase the deltas (in absolute terms) but I'd also not like to flip to positive deltas either in case we do pull back. So I add 4 calendars about 35 points above the money at 5500.

This expands the tent quite bit, and cuts my position deltas to -1.58, basically in half. My next time to consider an adjustment on the upside would be around 5500 (the center of the calendars). SPX gets there about 2 days later.

So now SPX is at the center of the calendars, and delta has gone up to -2.32. This trade isn't in terrible trouble yet, but I'd still like to keep my position deltas low. So I decide to take off one of the original butterflies (there were 3 to start).

This keeps my tent wide, lowers my position deltas to -1.16 and takes some risk off the table since I sold off one of the original flies. While the day wasn't a wild one, SPX kept going up so before going into a weekend, I took of another of the original flies.

This cuts my position deltas to almost 0 going into the weekend. And then something nice actually happend. The market didn't move like crazy for nearly a week so I didn't have to do anything for most of the next week. The only issue was the P/L which was still down quite a bit, 25-30%. My goal is to wait as long as possible for time and, possibly, IV to help me. IV dropping was hurting this trade as the calendars made it long Vega so I'm just waiting it out and watching my price risk. I do nothing with this trade until Thursday of the next week (May 1, 2025) when the trade looks like this:

My concern here is if SPX keeps running up as it's been on a slow grind up over the past week. I don't need to do anything too drastic, but I do decide to finally give up on the last original butterfly as SPX has gone up way beyond it being useful at this point.

By the next day, SPX moves up another 90 points by mid-day. So I'm glad I cut the deltas. My issue now is I'm running out of room on the calendar tent.

In this case, delta isn't really a problem, but the calendar tent is so I add 1 calendar to the upside. This technically flips the sign on my delta which I prefer to avoid, but the absolute value in so low, it's a trade off I'm willing to make.

Now, there comes a point when every trader has to decide what to do with a trade. This trade has been through a lot. What happened after this last adjustment was about a week of calmness. Around mid-week, the trade looked like this:

At this point, the trade is about 8% down. Recall when it first got into trouble it was about 20% down. For me, this is a good time to just take it down. This trade was likely never going to be a winner, but sometimes the best you can do is minimize the loss and have it do less damage to the account. Would taking it off at 20% been wrong? No. As you say, it got much worse before it got better. But this was an experiment I ran to show that managing a trade by the Greeks can help navigate a crazy market.

I hope you found this post useful and can incorporate some of my ideas into your trading. As always, reach out with questions or comments.

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2024: The Year of the Mulligan

2024 was a challenging year for me. It started out very well, but from the middle of the year on, it was mostly down. I ended the year just above break even at $64.16 for the year. Way too work for that little money. :)

So I had 3 good months, but not nearly enough to make up for the bad ones. There's just no way to sugarcoat this. I didn't trade well. In the 2nd half of the year I won 66% of the time. I did better in the first half which brought my win rate for the year up to 73% which isn't horrible, but not my usual 80% of past years. The problem is that on average my losses were twice as big as my wins so even though I won more than I lost, I can't make money taking that many losses.

Looking at the equity chart for the 2nd half, July and November were particularly bad. I say that roughly because some of the trades were carried over from the previous month, but that's where I had the most issues.

So what was going on in those months?

The pattern I see that caused me issues was a big drop followed by a quick rebound. As I'm a range-bound trader, this makes sense. While I do well in a back and forth market, if it's that spastic, it's a problem for me. I need to handle those markets better, probably by getting out and waiting more rather than playing them. At a minimum, I have to trade smaller when the market gets rough. I did, however, manage one spec trade on VIX that did well in the August 5, mess.

Other Visualizations

I have some observations from my performance charts. It looks Calendars did better overall vs Butterflies. The rest of the trades were tiny and not really consequential.

Note: The “Custom” trades were the short term fly/calendar combos that I was playing with. I concluded that I really don't like them and will likely not continue doing them, but it was good to try them. The “Speculation” trade was the VIX vertical that I did when VIX spiked in August.

I also confirmed that I don't really do well super short term. I did experiment with a couple of them and they really don't fit my style. My plan is to stick to > 10 DTE this coming year with most trades being around 20 DTE which seems to be my sweet spot.

With respect to days in trade, I do best when I'm out in less than a week. Once a trade gets over a week old, I need to start getting strict about whether I stay in or not. This gets back to my “Pets vs Cattle” mantra.

Wrapping Up 2024

While it was a rough year, I stayed in the black and I think I learned something about me and how I trade. And that is the purpose of doing these reviews. Now I need to hold myself accountable for executing on the lessons learned. Stay tuned to see how I do. I hope this kind of review helps you in your trading.

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This post is a follow-up to my previous post “The Art of Adjusting”. In that post, I gave an example of how I adjusted a trade. While the point of that post wasn't to get into the choice of the adjustment, I think that topic is one I'd like to cover. The first post was about why and when I adjust. This post is more about how I adjust. This is something I've been working on for years and will continue to evolve as I trade more but I think it's a good topic to cover, especially for new or even intermediate retail traders.

To reiterate my point in the last post, adjusting isn't required in any way. There is nothing wrong with putting on a trade and taking it off for a profit or a loss depending on what happens. Adjusting is, essentially, trying to buy more time for the trade to work...and it does have a price, there is no free lunch in this game.

Adjustment Concepts

My two goals in adjusting is to buy time and lower some kind of risk. These two concepts are related and, ideally, work together to help a trade work. From a buying time perspective, the simplest way to buy time is to “expand the tent”. I will borrow the example from the last adjustment post to demonstrate that here:

As you can see, the second image has more room to move than the first. By adding the calendars to the upside I expanded the tent under which I am long theta so time works for me rather than against me. This matters because one of the ways this trade makes money is time decay. I'm selling more time decay than I'm buying which means time works in my favor (thus being positive or long theta).

However, this adjustment did more than just expand the tent and buy more time. It also reduced some risk, mostly price risk. The delta (which is one Greek that represents price risk) went from -9.75 to -0.84. That's a significant drop in price risk. At least in the short term, the price movement of SPX doesn't affect my trade nearly as much post adjustment than it did pre-adjustment. That's a double-edged sword, of course. If SPX goes down, it's much more beneficial to have -9.75 of delta than -0.84. However, this is intended to be a non-directional trade so low delta is key. It can make money on price movement, but the primary goal is to make money from extrinsic value (time and implied volatility). So lowering price risk is a good thing in this case. In addition, by adding the calendars which are also long theta, the total theta of the trade increases from 58 to 131. So the trade should benefit from time decay more post-adjustment.

But there is no free lunch in trading, it's always about trade-offs. So what did I trade-off in this adjustment? The first is total risk. I made the trade larger which increases the total risk of the trade. I always say size is the first and most important risk management tool. This trade started out with $3,100 of risk. Post-adjustment that total risk is $5,575. That's a significant increase in the risk of the trade. While I intend to manage the risk so that I don't lose the maximum amount, it's still possible. Additionally that capital is not tied up in my account so it can't be used for other things, so there's an opportunity cost as well. For my account, this increased risk is acceptable but each trader has to consider this when making an adjustment.

There is one other interesting risk change that I made that I didn't talk about in the first post...Vega or IV risk. This trade started as a butterfly which is short Vega, i.e. it benefits when IV goes down. In general, IV is opposite of price. When price goes up, IV goes down, and vice versa. How much depends on the speed of the move and there are exceptions to this, usually at some sort of extreme end. One of the fundamental pillars of my trading thesis is that volatility is, ultimately, mean reverting. So I tend to be a contrarian when it comes to IV. As IV goes up, I want short Vega, when IV is low, I like to be long Vega. I can't predict when it will revert, but I bet that it will happen soon enough. I could 100% be wrong about the timing but if I have to pick a direction, that's what I pick.

Given my thesis about IV, why add calendars to the upside? Unlike butterflies, calendars are long vega, usually quite long vega. I am making the adjustment in this case because SPX went up which typically means IV is coming down. Thus I want to be less short Vega or even long Vega post-adjustment. The other consideration is what if SPX reverses and the calendars are no longer needed? That would be a down move which usually means IV will rise. That benefits the calendar that I will likely take off which means while I still may close it for a loss, it could be less of a loss if the calendar got a boost from a move up in IV. In the example above my trade went from -106 Vega to 167. That's a big jump and, looking back, probably too much of a jump. This is why I review every trade. It leads me to tweak my strategies over time. But the theory here is that if IV is falling, I should get longer Vega and I certainly did that here. Now I'll show a more recent example of this where I made a change based on the trade above.

A New Example

About 10 days ago (Aug 22, 2024) I put on a 29-day SPX butterfly centered at 5570 in the calls with wings 70 up and 80 down. I chose a butterfly because VIX (which is one indicator of volatility in SPX) was 17.69 which is on the high side over the past few years so I wanted to be short Vega. It's a small trade for me, a 1-lot with $1,650 of risk.

As you can see this is near the money with low price risk (–.80 Delta and –.02 Gamma), 14 theta and short Vega (-64). This is classic non-directional trade. The idea is that as long as SPX stays in the price tent (between 5507 and 5632), the trade will make money on time decay. There is less risk at the start on the downside than than the upside although at the extremes it's the other way around because the lower wing is further away than the upper wing. Most of the time in this trade my first adjustment would be to the upside since short deltas would work against me. And that's exactly what happened...the very next day.

So early in the day, SPX went right to my adjustment point. Not good. I'm down about 3.5%. It looks like I got a little help from Vega as IV came down but not enough to compensate for the fast move up. In the first hour of trading, SPX is up about 1.5 standard deviations, not common, but it happens. Now is the time I'm glad it's only a 1-lot. My price risk has increased to -2 deltas. Not horrible, but not great on a 1-lot that started with less than -1. My biggest issue here is the speed. Had SPX slowly climbed up here I would not be as concerned but this could get out of hand if I don't do something. I could just take it off for a small loss. Nothing wrong with that and if I hadn't found an adjustment I liked, that's what I would have done. Some trades just don't work. But I did model a few options and decided to make an adjustment. I added 2 calendars to the upside at 5675 in the puts.

So that's what I did, but what's more important here is why I did it. First, I gave myself a good amount of room if SPX keeps going up. The calendars are centered about 37 points above the current price. Second, I cut my price risk significantly from -2.0 deltas to -0.03. I upped my theta from 13 to 37 and I flipped my Vega from the original -64 to +66. Remember, we just had a big up move so IV came down, so I'm ready to flip to being long Vega in case of a snap back. So if we do snap back, my calendars won't do as much damage thanks to their long Vega and if we keep going up, I have almost 40 more points before I'd need to look at adjusting again. In exchange for that I increased my risk from $1,650 to $2,315, about 40%. That's acceptable to me given the other risk changes. This is why I chose to make the adjustment. Recall in the first trade I increased my risk by 80% (almost double). I used to always double up on these types of adjustments. I have since learned that this isn't always necessary. I was able to buy more time at a reasonable cost that lowered my most immediate risk (price movement) in a way that if I'm wrong and the market reverses I'll take less damage. If I hadn't found something like this, I would have taken it off and tried something else.

So, what ultimately happened? I stayed in this configuration for a week. SPX did, in fact calm down and I was given time to build theta over time. Eventually SPX did come back down and the long Vega that I created by adding the calendars helped the trade. I ended up taking it off for about 6.5% in 8 days.

Was this my best trade? No, it wasn't even my best trade that month. However, in a time when my underlying moved quite a bit in a week, it made money. Usually my best trade just work and no adjustments are needed. But, as shown in this case, I was able by adjusting to turn a trade that started off in a difficult position and could have easily been a loss and made it a moderate winner.

Reviewing This Trade

As I said before, I review every trade I do whether it's a winner or not. In doing that review, one might say that if I hadn't adjusted it and just held on, it would have done better. And that is absolutely correct. In retrospect, the adjustment was entirely unnecessary. SPX came back well within the original tent of the butterfly. The fly would have closed for a better profit in less time. This is all true. However, this is relying on 20/20 hindsight. We know now that this would have happened, but there was no way to know that for sure at the time. My goal is to manage risk and that happens in real time. Sometimes managing the risk means profits take longer, come in less, or cause losses where hanging on would have won. There is no sure fire way to always win and sometimes adjusting ends up being the wrong thing to do. We can't see the future. The best we can do is manage risk in the present. In this case, I don't think I would have done it differently. This is an important part of trading...learning from your trades. I learned from the first example trade that I'd prefer to find an adjustment that doesn't add as much risk to the trade and doesn't flip Vega quite a far. And I do that in the 2nd trade. Reviewing the 2nd trade, I didn't decide to change how I trade but it was good experience in trading turbulent markets. I hope these examples give you not only ideas about how to trade, but help show you the methodology and mindset of my trading. My way isn't the only or even the best way, but what's important is understanding how to learn to become a good trader. It's a continual process. My goal here is to show that process. Hopefully this helped do that.

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What a Difference 1 Month Can Make

This year started out quite well. Then May happened where I really didn't manage things very well and ... well here are the results:

So January was fine. February wasn't great but off months happen. March and April were very good...then May. May was so bad it blew away everything. That can happen when traders mismanage trades. See my review video for May 31, 2024 entitled “May, May Go Away” for all the details, but for the purposed of this summary, the results speak for themselves.

So What Happened?

As many traders will know, all it takes is one bad one to mess things up and that's exactly what happened in May. I let one Narrow Calendar get out of control and took a 50% loss on it. I did have 2 other losses so the month wasn't great, but that's the one that made the big difference. My trading plan is based on the idea of winning most of the time and keeping losers under control. I didn't do that in May and that was the result.

Is it catastrophic? No. I had built up some decent profits earlier in the year and my account is fine. As I've said from the start, this is a learning account and that's what I did...I had to re-learn discipline on bad trades. Losses happen. They are a part of the business. It's ok to have a loss take out 1 or maybe 2 wins. But it can't wipe out month or more. That is not how to grow and account. So I have reset for the 2nd half and am working to get back to the discipline that got me 30% last year. I know I can do it, I just have to execute.

To see how February and, especially, May affected my account, just look here:

I fell into the red a couple of times, but managed to end the first half above water. Not by much, but given those 2 bad months, I'll take it.

Visualizations

Here are the usual stats and this time there is a lot of skew that would lead one to some false conclusions. This is due to the small number of bad trades, especially the 50% loss above. Here is the first example: strategies:

This would leave one to believe that calendars were not a good trade. That is far from true. But that one bad trade accounts for the entire overall loss. So I would argue that calendars did work overall. I only did 2 verticals so there's not enough of a sample to say anything useful. The data is the data, but sometimes context is needed when trying to learn from it.

Another place where there is some skew is in days in trade. It generally follows the normal pattern (the less time in a trade, the better) but 2 trades skewed it a bit:

Here the 8 and 15 DIT are skewed by my 2 biggest losses. It's still good data to know, but I don't think the time in trade was the issue. But I can still say that, in general, the less time I'm in a trade, the better. This is because the longer I'm in a trade, the higher the chance of adjustments. That doesn't mean adjusting is bad, but that once I start adjusting, I need to be extra vigilant about that trade and keep it on a shorter leash. Bigger losses happen for me when I over-adjust. On the bad trade in Feb, I adjusted 6 times. That's too much. On the bad one in May, it wasn't too many adjustments, I just mismanaged it in other ways and needed to take it off earlier.

Closing Thoughts

I'm not going to dwell too much on the negative. It wasn't all bad. I had a 79% win rate which is on the upper end of my range so I managed most trades just fine. The key is to prevent the big losses that can wreck things. I thought after last year's success I was really good at that. It was time to re-learn my Pets vs Cattle lesson. If I can do that, then I can salvage something good out of this year. Onward!

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This is a topic I've been thinking about for a while. I think it's something that, especially new, traders don't understand well. So I want to share my ideas around adjusting trades. What is it? Why do I do it? When do I do it? This is a journey every trader must have individually, but maybe this will help some traders out there along the way.

What is an Adjustment?

This sounds really basic, but I think it's important because this is the root of a lot of misunderstanding, in my opinion. What exactly is a trade adjustment? When a trade is being challenged, it's possible to make changes to that trade. Some people think they are “fixing” the trade, but I disagree with that view. I prefer to think about adjusting as buying time to give the trade a chance to work. Most adjustments fall into two major categories:

• Adding capital to the trade
• Realizing a loss to the overall position

In both of these cases, you are taking on some level of risk in exchange for the opportunity for the trade to be successful. The net result can be adding more room to one side, lowering price risk (delta) but in general an adjustment adds some form of risk to the trade, either explicitly in the case of adding capital, or implicitly by realizing some loss that must be overcome in order to make the profit goal or to be profitable at all.

When to Adjust?

This is probably the biggest and most difficult part of adjusting. As one of my mentors always says, “When you adjust is more important that how you adjust”. Early on, many traders use simple strict rules on when to adjust. For example, if the underlying reaches a certain price, or if the position deltas reach a certain level, or at a certain P/L. All of these things are good ideas but over the years I have developed a holistic approach to adjusting. This approach looks at multiple factors. It takes experience for each trader to figure out but hopefully this will help guide some traders out there. Here are the factors I look at together when figuring out when to adjust. Keep in mind that most of my trades are range-bound and non-directional. So my goal in these types of trades is to keep the underlying inside my structure and my price risk, especially delta under control. If you are trading more directionally, some of these concepts may not apply.

P/L

This one seems simple but took me a while to figure out. I have a hard and fast rule: if I'm at an adjustment point and I am up any amount of money, I do not adjust, I simply take it off. I'd rather just take off the trade and put something else on, perhaps even the same trade but re-positioned better based on the new market conditions. Some people might consider that an extreme version of an adjustment. But, in my opinion, if the entire trade is taken off and replaced, it's a new trade. It's really a matter of accounting at the end of the day, but that's how I see it.

Conversely, if I am at my max loss, I am very cautious around adjusting. I can't say I won't adjust at all, but I'm less likely, especially if the adjustment involves adding more risk. I can't say I 100% won't adjust as I did if I'm up money, but it's a strike against adjusting and I will consider other factors as well.

Greeks

When adjusting or deciding to adjust, I always consider the greeks of the trades, both the current greeks as well as the greeks post-adjustment. This is especially true for the price risk greeks, delta and to a lesser extent gamma (although gamma comes into play later). My goal when adjusting is to lower my price risk (my position deltas) because the trade has moved against me and I want to lower the impact of price movement. I don't want to adjust into a trade that increases my price risk.

Looking at delta may also be a reason to not adjust when I might based on the underlying price. If my trade is approaching an adjustment point but my deltas are very low that could be a reason to not adjust and wait to see how the underlying moves. This would be in conjunction with other factors, of course, but it's an important one. For example, if I have a 4-lot on and my position deltas are < 1, I'm far less likely to adjust the trade because my price risk isn't particularly bad. It's safer to wait it out a bit because the price continuing to move doesn't hurt as much. However, if I have 9 deltas (long or short) on that same 4-lot, that's a reason to consider adjusting as on most of my trades I would want to lower the risk of a price movement.

Events

We do not trade in a vacuum. While there are events we cannot predict, there are plenty of known events that effect when/if I adjust a position. As I primarily trade SPX, big events for me are FOMC meetings, some earnings for the larger components of the index and, in the past few years, CPI prints. Other underlyings may share these or may have others as well. But if one of these events is eminent, I may be less likely to adjust a trade and more likely to close it. This isn't a hard and fast rule, but definitely a factor to be taken into consideration with others to build the holistic view.

Another thing to consider is that as big events approach, the greeks don't act as expected. For example IV could nullify positive theta. So if my trade expects to recover based on theta decay, I may not want to hold that trade through a big event if it's already in a position where I am considering an adjustment.

Speed/Direction

Again, my trading style is typically non-directional so most of my trades have risk on both sides. These trades work really well when the market is calm and is staying in a range. But when the market really starts moving, especially in one direction, that may affect my decision with regards to the timing of my adjustments. This goes hand in hand with events above. Some trades look good when they go on, but not so good later on. Not every trade will work, and sometimes the best things you can do when the market conditions change is to just take off the trade rather than try to keep it going.

Time in Trade

This is a critical element to making a decision to adjust. How much time has the trade been on and, more importantly, how much time is left. When I adjust, the idea is to give a trade more time to win. But in order for that to happen, I need there to be time left in the trade. If you follow my content, you know that I avoid expiration week (tl; dr: due to the high gamma which drastically increases price risk) so that means that as that time approaches, I would like to have at least a few days for the trade to work before expiration week starts. This means by Weds of the week before expiration week is about the latest I would likely adjust, especially if that adjustment adds risk to the trade. If the adjustment lowers risk, I may consider it based on other factors but my goal would still be to get out before expiration week or Monday of that week at the latest.

Another aspect of time in trade is how quickly an adjustment comes. I am careful about adjusting very early in the trade and especially careful about adjusting very shortly after making an adjustment. The former is important because it's a sign that maybe this trade wasn't right for the current conditions, the latter because trades need time to recover after an adjustment and back to back adjustments are usually not good in my experience. The most extreme case of that is needing multiple adjustments in a single day. If that is needed, I will likely just take the trade off for a loss instead.

An Example

Here's a trade I did last year where I did both types of adjustments on the same trade. I don't do multiple adjustments on the same trade very often but, in this case, I did and I think it demonstrates the two categories of adjustments.

I started out with a 2-lot SPX butterfly centered near the money. This is a common trade of mine when IV is on the higher side as it's short vega. In this case, the very next day SPX goes up quickly and the trade gets into trouble as shown here

So let's run it through my tests:

• Price of the underlying is near my adjustment point: YES
• I am down money: YES
• Position deltas are -9.75 on a 2-lot: YES
• Speed/Direction: Underlying moved here 1 day after the trade went on (1.67 SD move): YES
• Time in the trade: Plenty of time left, only 1 day into the trade [WARNING]
• Major Event: NO

That is enough checked boxes to adjust this trade. The only over-riding factor is sometimes when a trade gets in trouble on day 1, I consider taking it off. The process to determine whether to adjust is a bit more subjective and involves me looking at the graph after and seeing if I like it. In this case, I chose to adjust (if I didn't it wouldn't be a good example). The adjustment I chose was to open up a 6-lot calendar about 45 points above the current price. I opened my short leg in the same expiration as the flies and opened my long leg 5 days later (SPX has daily expirations). Why I chose this is likely a topic for another day reach out if you would like me to cover that, but for this blog, the point is to show the process of deciding to adjust. So post-adjustment, the trade looks like this:

This is an example of adding risk to a trade. I didn't touch the butterflies but I added the calendars to the trade creating this double complex. Advantages of this adjustment are:

• Much lower deltas -9.75 to -0.75
• Room to the upside if we keep going. I'd let this trade go all the way to the center of the calendar, about 45 points higher while still having downside room from the fly.
• Increased theta 58.40 to 131.77

The biggest downside of this adjustment is the increased risk: $3,100 to $5,575 so not quite double but still more risk.

But this isn't over, the very next day SPX kept rising. In fact, it rose past the center of the new calendars I put on the day before. It took all day to do it, but it did, and near the end of the trading day, the trade looked like this:

So let's run this trade through my tests again:

• Price of the underlying is near my adjustment point: YES
• I am down money: YES
• Position deltas are -9.72: YES
• Speed/Direction: Underlying moved here 1 day after the last adjustment: (1.06 SD move): [WARNING]
• Time in the trade: NO (only 1 day from last adjustment)
• Major Event: NO

The only real objection I would have to adjusting here is the fact that I just made an adjustment yesterday. I show this to demonstrate that all the factors may not agree and, in those cases, it's up to the judgment of the trader. In this case, I do decide to adjust with the caveat that this trade is on a tighter leash, meaning if I want at least a 2 or 3 days before I would consider adjusting again, especially an adjustment that would involve adding risk to the trade. So I did adjust and now the trade looks like this:

This is an example of realizing a loss on the overall position. I closed the butterflies, leaving only the calendars. So the trade has changed quite a bit, but I still consider this the same trade because the combined trade was one trade. I will note this is really a matter of accounting. Either way I took a loss on the butterflies. It would be fair to just consider the flies a total loss and the calendars a new trade. But the way I trade this, it's still the same trade. Now I am asking the calendars to make up for the loss I took on the butterflies in order for this trade to be successful.

This is an important concept in adjusting. I didn't really fix the trade, I simply bought more time for it to succeed but I am making it tougher for the overall trade to succeed as I realized a loss on the butterflies. This is where traders can over-adjust and keep digging a deeper hole from which the trade will likely never recover. This is why the adjustment decision is so important. It can be the difference between a small loss and a huge loss. That being said, let's review the results of the adjustment:

• Much lower deltas: -9.72 to 1.16
• More room to the upside: the flies are no longer pulling on the upside
• Less overall risk $5,575 to $3,280.

The lowering of the risk was a big reason why I was willing to do this adjustment. The trade is struggling and I'm taking risk off the table. The main downsides to this trade are the theta reduction (115 to 82) and the less downside room as the flies are gone.

I don't want to take this trade all the way to the end because this post is likely long enough. But at a high level I did do one more adjustment, but it was 4 days later, had it been sooner I wouldn't have done it. But 4 days gave the trade sometime to recover. But SPX did come back down and I re-added flies on the downside. Then SPX really calmed down and I was able to close the trade for a profit 6 days later. What made this trade work even with 3 adjustments was SPX slowed down and eventually became range bound. And that was the point of doing these adjustments: buying time to allow SPX to calm down. Sometimes that doesn't happen and the trade just needs to close for a loss. But this is why if you are going to adjust, you must be careful in how and when you do it and having a solid methodology is critical.

To Adjust or Not to Adjust?

I will close this post with a final idea. Do traders have to adjust? The answer is no. There is nothing wrong with having a “no touch” policy where a trade goes on and then is taken off under a set of conditions either positive or negative. There is a simplicity to that approach. But like everything in life, it all comes down to trade-offs. By not adjusting you will likely take losses that could have been avoided if the trade had more time, like in the example above. I could have taken off that trade after one day and just realized the loss and tried something else. The flip side is that adjusting can increase risk and cause bigger losses than originally intended. This means every trader has to decide if adjusting is a good idea or not. There isn't one perfect answer.

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A Similar but Better Tale

I called 2022 “A Tale of Two Halves” and 2023 ended up similar. Once again, the first half of the year was very good and the second half was less consistent. However, I did better in 2023 than I did in 2022 in most ways. I only had 3 losing months, 2 months where I made money but didn't make my goal, and 7 months where I made or exceeded goal 3 of which I more than doubled my goal.

November was really the only bad month. I had a couple of bad trades one of which got caught in a big gap up. I was having a lot of success leaning bearish in October and the winds shifted. That's one lesson I'll take from 2H 2024.

However, last year I made an annualized return of 8%. This year I made 30%. Neither one met my goal of 42.5% (3% per month), but I can safely say that I traded better in 2023.

But back to 2H2023. I won 35/45 trades which is good. My main concern here is the average size of my wins vs the average size of my losses. While in 2H2023 it wasn't horrible, there is room for improvement and improving here will greatly help my overall earnings.

What Worked? What Didn't Work?

If I had to guess what worked the best in the 2H, I would have guessed calendars, but I was wrong, it was butterflies. This is why doing this kind of analysis is important. Ultimately I think I had a bit of recency bias as I did a ton of calendars near the end of the year, but in October especially my butterflies did really well as the market went down. That being said, my calendars did very well. I started experimenting with diagonals and double diagonals with very mixed results and both of them ended up being net losers. That's ok as I was really learning them this year. I would consider doing them again at some point, but if I do, I need to keep them small. (Note: The “custom” trade was actually a butterfly that I mis-labeled when I put it on).

Visualizations

Here are a couple more charts that show some interesting things. First, this is my P/L over the course of the 2H2024.

What stands out to me here is the ups and downs on a monthly basis with the biggest swings being from October to November. November knocked out most of my impressive gains in October. Had November been break even I would have made my goal for the year. The lesson here is that if I can better keep losses under control, my goal which appears ambitious is very achievable.

Next let's look at days to expiration. The sweet spot was clearly 11-16 days with the worst being 9 days which were likely my experiments with various diagonals. But this make sense as most of my trades fell in the 11-16 day range.

Finally, here is the days in trade. What I see here is that my best trades last 5 days or less. This is in line with other recent time periods. My good trades tend to work quickly. It's not that I can't stay in longer, but once they cross 5 days, I need to keep them on a tighter leash.

Thoughts on 2023

Overall, I'm happy with how I traded in 2023 as it was a big improvement over 2022 and previous years. The key to making the next jump is controlling the size of losses. I win enough trades to make good money but the difference between making good money and great money is the size of the losses. I'd like to see the gap between the average win and the average loss to shrink. It's ok for the average loss to be a bit higher but in the 2H of 2023 my average loss was about 2.5x the size of my average win. I'd like to get that closer to 1.5x, even 2x would be an improvement. If I can do that, I can make my goal of 3% per month. From the data above, being cautious of trades going over 5 days is one way to get there, along with better overall risk management and, of course, Pets vs Cattle.

Until next time...Good Trading!

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