As soon as I heard on Bloomberg Radio that DELL was withdrawing from the PAR bidding war with HPQ, I set myself to my trading platform to put on an appropriate "quote" -- trade. My general thesis was to short the winner and long the loser. It's a little twisted, but there is the issue of the winner's curse that one must consider. Thinking quickly (yup, must be quick), I constructed an Iron Condor with short put verticals for DELL (it's going up) and short call verticals on HPQ (it's going down, down). Both short puts and calls where placed just out of the money, so 12 for DELL and 40 for HPQ.
Firstly, I did a ratio of 3 DELL for 2 HPQ. But this was derived from thinking too quickly and I owned up to my error in thinking in short order by adjusting the ratio to reflect 3 DELL for 4 HPQ. I wanted to risk equal amounts on each side, I think.
It took only a matter of hours for me to take this trade off, for a small loss. The commissions I paid were actually greater than the trade loss, and thankfully they were relatively small in size.
The true course correction was not adjusting the ratio of call spreads and put spreads, but of realizing that I was trading from the proverbial "hip" and it was high time I stopped this horrible habit. Jumping into a trade with my only confidence being I could be clever in constructing spreads is not good. This is one of my major weaknesses. Being clever. My other big issue is getting out too soon, but that's for another post.
I lost on this Iron Condor day trade, but I won by overcoming my impulsiveness. Sometimes when you lose, you actually win. Weird, huh?
0 comments:
Post a Comment