What makes you lose money with the PCCRC????

I will be on your face and say:

1. Not following the rules.
2. Impatience.
3. Experimenting.

Yet, if I had not done any of these three things I would have learned nothing. So free yourself from the 3 items above once and a while, but be prepared to lose money. By the way, it is a lot easier to lose in one trade when you are winning in most of your trades, so be free to experiment, but also implement the PCCRC strategies I have outlined and see if you can reproduce them first.

Now, here is a theoretical answer that would apply in most cases when the trades do not work out:

Options depend on the GREEKS. That is Theta, Delta, Vega and Gamma. I have said that Theta, Delta and Vega are three horses pulling a carriage. Let’s use the Greek chariot, instead. You can include Gamma if you will. Greeks may work individually or in combination to generate profits. The way you may lose, of course, would be if ALL of the 3 Greeks work against you at one time. That is: the stock goes down in low volatility. You still have the hope that the stock may continue to go down sufficiently to give you profits or IV might spike or the stock may go back to your striking price. In most cases, you just as soon get out with small loses, rather than stay indefinitely in a trade that may or may not fix itself.

By far, the most influential of the Greeks is Vega. A 5% increase in Vega can be sufficient to produce a 200% return on risk. Most option trading strategies AVOID Vega. With Condors, you want to make money from Theta decay while avoiding the impact of a Vega impact, although your trade remains susceptible to Delta. With vertical spreads, you neutralize Vega, but you expose yourself to a decline in Delta (for bullish spreads) or a rise in Delta (in bearish spreads). The only one of the common trade strategies that benefits from Vega spikes is the straddle, but we know how susceptible it is to time decay. Only the PCCRC takes advantage of the 3 Greeks, and even the forth Greek (in some scenarios).

When you place a PCCRC you decide not to control Vega, take it by the horns so-to-speak as if it were a bull, but rather to ride it. So instead of a bull out of control that needs to be tamed, I think of Vega as a powerful horse pulling my Greek chariot. For that, though we need to “buy low and sell high….” VOLATILITY! To be specific, we need to buy low Implied Volatility and sell high volatility.

But you need to control Delta and Theta. When you enter one of my strategies, you anticipate that the stock is going to go UP. In fact, the configurations of my risk graphs appear to be more bullish than bearish, but that is only apparent because Vega is likely to reduce in an up-trending market while increase in a down-trending market. Even if your up-trending market surprisingly reverses and goes down, you can count on Vega to carry the day, and make you profits when you expected losses.

Occasionally, however, IV may decline and the stock might move sideways. In such cases the decay of the front month options may decay sufficiently to justify your staying in the trade month after month until finally Delta or Vega move sufficiently to give you strong profits. As expiration Friday approaches, I make a decision to exit the trade or rollover my shorts to the following months. My decision should be based on the merits of the resulting trade, and not on the past performance of the trade thus far.

So what could cause me to lose money? A decline in stock price with a simultaneous decline in volatility could. In such cases, all three Greeks will work against me as Theta would not be of much help, since the front month puts may increase in value with the decline. I have also experienced sudden IV declines following news releases. Imagine a balloon being filled in advance of a news item, which it then deflated once the news are out. The news, such as earnings released, must be anticipated as to their occurrence, if not their content. One the news is out, uncertainty is removed and so is the fuel for Vega.

Now you may say, I am not a full time trader, I cannot be watchful of Vega, I need to be at work. Well I designed my strategies to be able to go out on vacation for extended periods of time in far away places and still make money. In advance of my trip, I may rollover my short options to the next month, assuming that I will be back 1 week before expiration. If earnings is to occur while I am away, I may as well exit the trade. I prefer to enter right after earnings because then I will have 90 days for the trade to work, without my constant watchful eye. Besides, right after earnings, IV will decline in most stocks, so I known Vega will be on my side. If you the IV of the underlying you are interested in does not decline after earnings, Avoid that trade!

You may say: I have seen you adjust many of your trades, you obviously watch your trades every day! Now remember, I am a full time trader not because I must, but because I want to. If I go on a long trip, and come back and see that I missed to top of profits in one trade, let’s say 200% return on risk, and it is now 50% return or risk, I just have to say to myself, what could be better than earning 50% with a minimum effort? This is important, because the 150% difference between the two trades would be my salary if I were a full time trader, and then you’d have to subtract whatever the S&P500 would have made me during the time I was way. So yes, I have given you many clues on what to do to luck in profits they accumulate during the life of the trade, but I assure you, you’ll do just fine, even if you don’t change a thing.

There is one more, VERY important thing: The PCCRC strategy has very natural decision points, both to enter and to exit: earnings and expiration. Be aware of those two dates for every trade you place. Be sure to exit in advance of either, and you’ll do fine. It is at these two points where you should be ready to realize your loses (or profits) and move on!