Watch HowardCohodas Trade Index Options Credit Spreads - Humble Pie Edition

[HowardCohodas]

March tested my metal in managing the spreads I trade. I did some things right, I did some things wrong and it cost me a bunch.

I intended to complete my analysis and publish this week, but I am late in delivering on this obligation. I'm off on another business trip and will not be free to work on this until the middle of next week.

Stay tuned here for the details. Thanks to all who have sent me private messages of encouragement.

 

[HowardCohodas]

At the request of a frequent poster to my previous journals, I am considering adding some members to the list of those who can post here. I will not make my decision until I am ready to post my report.

Should anyone else wish to be added to that list, please PM me with your request.

 

[HowardCohodas]

 

[HowardCohodas]

What happened in March 2011?

I did not have sufficient cash reserves to buy back all the spreads that reached their stop loss limits. As I was liquidating other spreads to raise cash, the market rapidly overran my position and put me deeply in loss for the spreads that were in trouble. Had I maintained a proper cash reserve, the month would have been closer to zero, plus or minus a small amount.

From feedback in some threads, I learned that my cash reserves were too small, and I was slowly building them up as expirations arrived. I simply did not do this quickly enough, nor did I have a clear idea of what was needed.

I now have an analytic method of allocating my resources among the two instruments I trade (NDX and RUT) and among the time frames I trade (weekly, near month, and the month after the near month) and cash. A lesson learned at significant cost. But then, aren't they all.

 

[HowardCohodas]

Much of the commentary in other threads seems aimed at answering concerns about my strategy and the consequences that must follow. The problem for me is that when the premises of these commentaries are not reflective of my strategy, I end up questioning the conclusion.

Lost in all the commentary is the actual strategy. Here then, is the strategy as it is today including the allocation of resources among the two indexes (NDX, RUT), the time frames (weekly, near month, month after near month) and cash.

Credit spreads are traded as a unit. Iron Condors are formed when possible to take advantage of collecting an additional credit and balancing directional risk.

Credit Spread Entry Rules

1. Enter new weekly as soon as quarantined funds are released.
2. Enter new monthly (around 60 days to expirations) as soon as quarantined funds are released.
3. Short strike PoT target: 20%, maximum 25%.
4. Minumum spread credit of 3% of difference in strike prices.

Credit Spread Management Rules

1. If spread reaches 80% of its capped yield, and if there is another spread in the series that meets the entry criteria, then place a limit order to close. After close, enter the new spread in the same series if entry criteria are still met.
2. If spread has lost more than 20% of capital at risk, exit at the market. If another spread in the same series meets entry requirements and funds permit, then enter.

Credit Spread Exit Rules

1. In the last hour of the last day of trading, exit if PoT >= 10%. Otherwise, let it expire.

Target Resource Allocation

1. NDX
   • Weekly - 7.5%
   • Near Month - 15%
   • Month after near month - 15%
2. RUT
   • Weekly - 7.5%
   • Near Month - 15%
   • Month after near month - 15%
3. CASH - 25%

 

[HowardCohodas]

How do I report my results?

I report only on the isolated account devoted to trading index options credit spreads. Any discussion regarding my complete portfolio is outside of my reporting here and mentioned only in response to questions.

I report my results in three ways, each aimed at communicating a different perspective of the strategy.

The month on month graph reports the account change from month to month. It therefore incorporates the results of trading, the size of the cash reserve and trading costs. There is no variation in accounting for profits vs. loses. It is strictly the account balance month to month.

The Iron Condor report addresses the return on a chunk of quarantined funds used to support credit spread trading in a given series. The implications here are that the same chunk of funds are used to cover one or more spreads. One spread if its mate that would form an Iron Condor is unavailable. Two if the mate is opened. More than two if one of the spreads is closed at 80%+profit and a spread is opened to replace it using the same funds.

The spread report is the most granular. It reports the return on the spread by itself, even if no additional funds were required because it was part of an Iron Condor.

 

[HowardCohodas]

April was tough, but not as tough as March.

 

[HowardCohodas]

All I Know About Trading Options I Learned in Flight School

As a Thank You to everyone who has visited this thread and knows that I like to use flying maximums when describing trading concepts, you can enjoy a random selection from over 130 I have accumulated.

All I Know About Trading Options I Learned in Flight School​

 

[HowardCohodas]

Re: All I Know About Trading Options I Learned in Flight School

As a Thank You to everyone who has visited this thread and knows that I like to use flying maximums when describing trading concepts, you can enjoy a random selection from over 130 I have accumulated.

All I Know About Trading Options I Learned in Flight School​

Added a whole bunch more. Hope you enjoy.