Watch HowardCohodas Trade Index Options Credit Spreads

[Martinghoul]

Misread on my part, for sure.

However, the point of an Iron Condor is one of the spreads gets in trouble, but the other leads to "makin' out like a bandit" as you say. And you get to do it a number of times for that expiration series.

Right, OK... Now I am properly confused, Howard. I thought we're talking about the "credit spread" strategy, where it's just selling call/put spreads? Didn't you mention that this is what you're doing (post 240), if I am not mistaken?

'Cause, actually, if H'Edge is more complex and consists of systematically being able to time the mkt to allow you to leg into a cheap condor, that's an entirely different kettle of fish. Let's define the context for our discussion, 'cause there might be some pretty interesting stuff at the end of this rainbow, actually.

 

[HowardCohodas]

Right, OK... Now I am properly confused, Howard. I thought we're talking about the "credit spread" strategy, where it's just selling call/put spreads? Didn't you mention that this is what you're doing (post 240), if I am not mistaken?

'Cause, actually, if H'Edge is more complex and consists of systematically being able to time the mkt to allow you to leg into a cheap condor, that's an entirely different kettle of fish. Let's define the context for our discussion, 'cause there might be some pretty interesting stuff at the end of this rainbow, actually.

Today seems a record for my adding confusion to things. I think this is number three for today.

For this discussion's purposes and the account I report on, I only do credit spreads and form Iron Condors where possible by selling another spread. Each spread is managed separately. The attraction of forming an Iron Condor, of course, is the second spread sold requires no additional margin so you get an additional profit with no additional funds and a small increase in risk.

Now, if the market stays sideways, the two spreads expire calmly and I keep the credit received which yields between 10% and 12% for the 60 day life left in the series. If the market trends, however, the spread farthest from the underlying instrument price will reach its maximum profit with lots of time left. I buy it back and form a new spread closer to the underlying instrument price. I have had this happen up to three times in the short time I have been trading in this account. That's four spreads on that side averaging 6% each. That's 24% for the Iron Condor life.

What about the other spread which is likely in loss territory for most of its life? So far, I have closed them for small losses (less than 5% of funds at risk). So an Iron Condor that was set up to yield 10% to 12% ends up yielding 19% or more. I set my bail limit at 20% but that has mostly to do with stomach acid production than any testing. Setting it at 20% means that because I bail "at the market" I might loose as much as 30%. So a failure requiring a bail out ends up leaving me somewhere between a 4% net profit to a 9% loss for the Iron Condor. That's a rough landing I can walk away from and be ready to fly again.

Any clearer, or have I muddied things even more?

 

[Martinghoul]

Today seems a record for my adding confusion to things. I think this is number three for today.

For this discussion's purposes and the account I report on, I only do credit spreads and form Iron Condors where possible by selling another spread. Each spread is managed separately. The attraction of forming an Iron Condor, of course, is the second spread sold requires no additional margin so you get an additional profit with no additional funds and a small increase in risk.

Now, if the market stays sideways, the two spreads expire calmly and I keep the credit received which yields between 10% and 12% for the 60 day life left in the series. If the market trends, however, the spread farthest from the underlying instrument price will reach its maximum profit with lots of time left. I buy it back and form a new spread closer to the underlying instrument price. I have had this happen up to three times in the short time I have been trading in this account. That's four spreads on that side averaging 6% each. That's 24% for the Iron Condor life.

What about the other spread which is likely in loss territory for most of its life? So far, I have closed them for small losses (less than 5% of funds at risk). So an Iron Condor that was set up to yield 10% to 12% ends up yielding 19% or more. I set my bail limit at 20% but that has mostly to do with stomach acid production than any testing. Setting it at 20% means that because I bail "at the market" I might loose as much as 30%. So a failure requiring a bail out ends up leaving me somewhere between a 4% net profit to a 9% loss for the Iron Condor. That's a rough landing I can walk away from and be ready to fly again.

Any clearer, or have I muddied things even more?

Well, hold yer horsies... What you're describing as the iron condor strategy is an entirely different matter and smth that might actually be very interesting (and, I suspect, if we find the elusive H'Edge, it's gonna be in the iron condors).

What I am trying to understand is the simpler "credit spread" strategy, which is the starting point, right? So let's decompose what you're doing into two parts:
Strategy 1: Credit spreads
Strategy 2: Credit spreads w/subsequent legging into "cheep as cheeps" iron condors, mkt conditions permitting.

By default, assuming the worst case where the right mkt conditions never actually occur, you end up running Strategy 1. Otherwise, you end up running Strategy 2. Let's say edge (or Sharpe or however you choose to define it) for Strategy 1 is HE1 (stands for Howard's Edge 1), while for Strategy 2 it's HE2. Therefore,
H'Edge = (1-P) * HE1 + P * HE2,
where P is the probability that the right mkt conditions do come along.

Therefore, to figure out what your total edge is we have to know HE1, HE2 and P. The point I was trying to make is that I am pretty sure that HE1 is, at best, 0, but more likely negative. Can you estimate P, based on your experience so far? An example trade would be nice, although, since I am not an equity guy, you'll have to be a bit more explicit with the strikes, etc.

All this, obviously, if you're willing...

 

[HowardCohodas]

Well, hold yer horsies... What you're describing as the iron condor strategy is an entirely different matter and smth that might actually be very interesting (and, I suspect, if we find the elusive H'Edge, it's gonna be in the iron condors).

What I am trying to understand is the simpler "credit spread" strategy, which is the starting point, right? So let's decompose what you're doing into two parts:
Strategy 1: Credit spreads
Strategy 2: Credit spreads w/subsequent legging into "cheep as cheeps" iron condors, mkt conditions permitting.

An example trade would be nice, although, since I am not an equity guy, you'll have to be a bit more explicit with the strikes, etc.

All this, obviously, if you're willing...

So far, I have been able to complete Iron Condors almost all the time. It may take days or weeks of patience after the initial spread was established. Right now, for example, all my spreads are paired into Iron Condors.

This is expiration week, so new spreads will be entered Monday after the quarantined funds are released over the weekend. I have begun publishing in this thread a trading summary at the end of the trading day and a trading plan before market opens for the next trading day. I also publish a picture of my Dashboard, which now includes identification information about how the spreads are paired into Iron Condors, and also the specifications of the legs of the spreads and the amount of the credit I received.

Furthermore, at the end of each month, I publish a summary of all results since the inception of this account to all my stakeholders. (wife, children, friends whom I've taught and now this journal thread). From this summary, you can have lots of fun playing with probabilities and you can tell me how I'm doing.

I'm at a loss to think of any way I can be more transparent than this.

 

[Martinghoul]

So far, I have been able to complete Iron Condors almost all the time. It may take days or weeks of patience after the initial spread was established. Right now, for example, all my spreads are paired into Iron Condors.

Right, so your legging into the condors has been almost always successful so far, in the 4 months that you have been tracking your performance? However, it's not guaranteed that it's always possible to leg and you cannot tell me how probable it is either? Hence, what you're telling me here is that you, basically, strap a position on in hopes that you'll be able to offset some of the risk later, when the mkt moves your way? This, in your view, is a viable strategy because it's worked well so far, during the 4 months you've been running it?

 

[meanreversion]

Ok Mr C, in summary

1. You are unable to articulate an edge, aside from perhaps fortuitous timing with rolling strikes
2. You are "agnostic" about market direction and volatility, thus you have no specific view
3. You use probability of touch as an approximation to spot finishing beyond the strike (this is like comparing apples to parsnips)
4. At any given time, you have at least 4 strikes on your book, and have yet to experience a fast market whilst trading options, i.e. you are shorting flexibility
5. Your stops need to be MANUALLY executed, i.e. if you're on a plane when the market kicks off, you're screwed
6. You have constructed a trading strategy with a vaguely ridiculous 90% win rate, so almost by definition there will come a time every year or two when you get annihilated

So, bearing in mind that you don't know exactly what it is you're attempting to exploit, and you're not experienced with trading option portfolios and your method of calculating opportunity is probably wrong, you're going full steam ahead.

Now that's what I call spirit. Altogether now, oh say can you see ...

 

[wackypete2]

(btw - for anyone reading this, I actually have no idea any longer whether I am using English or American spelling it's a hybrid...)

Just don't say "loose" when you mean "lose" and we will all sleep better at night

Peter

 

[meanreversion]

Just don't say "loose" when you mean "lose" and we will all sleep better at night

Peter

I've really f***ing had it with this lose/loose thing.

Seriously.. if your native tongue is English, is there ANY OTHER FOUR LETTER WORD which you would be incapable of spelling? Huh? I've thought long and hard and drawn a blank.

The reason I'm so f***ing annoyed is

a) the state education system in the UK is sheeeite
b) this means I have to pay £20k+ a year to educate my two kids

Thanks a f***ing million, you cnuts

 

[meanreversion]

And on a ****ing website where people use the word "lose" all the time, and still some ***** can't spell it. To describe it as brain-dead is an insult to all the zombies out there.

****

 

[wackypete2]

And on a ****ing website where people use the word "lose" all the time, and still some ***** can't spell it. To describe it as brain-dead is an insult to all the zombies out there.

****

lol.
I agree with you, but fortunately I'm less emotional about it.

Peter

 

[MrGecko]

Seriously.. if your native tongue is English, is there ANY OTHER FOUR LETTER WORD which you would be incapable of spelling? Huh? I've thought long and hard and drawn a blank.

Thanks a f***ing million, you cnuts

 

[HowardCohodas]

Right, so your legging into the condors has been almost always successful so far, in the 4 months that you have been tracking your performance? However, it's not guaranteed that it's always possible to leg and you cannot tell me how probable it is either? Hence, what you're telling me here is that you, basically, strap a position on in hopes that you'll be able to offset some of the risk later, when the mkt moves your way? This, in your view, is a viable strategy because it's worked well so far, during the 4 months you've been running it?

Besides the 4.5 months of live trading, I also have done simulations with 5 years of data and paper traded for 5 months. That is not an analysis, but could be sufficient data from which to estimate some probabilities. The rules I trade with were refined during the 5 months of paper trading, so I would have to go back to the back-testing and rerun them with current rules.

Putting on just one side of the iron condor is still done with reasonably conservative risks. I've already discussed what happens when the market goes against me with an Iron Condor a few posts back. Having only one side in place when the market goes against me is the degenerate case. I can expect a 20% to 30% loss of funds at risk.

I don't think that success requires the formation of an Iron Condor. Forming one reduces risk of loss and increases income when looking at the Iron Condor as a whole. If I don't form Iron Condors, then one loss takes out more months of profit than if I do.

 

[HowardCohodas]

Ok Mr C, in summary

1. You are unable to articulate an edge, aside from perhaps fortuitous timing with rolling strikes
2. You are "agnostic" about market direction and volatility, thus you have no specific view
3. You use probability of touch as an approximation to spot finishing beyond the strike (this is like comparing apples to parsnips)
4. At any given time, you have at least 4 strikes on your book, and have yet to experience a fast market whilst trading options, i.e. you are shorting flexibility
5. Your stops need to be MANUALLY executed, i.e. if you're on a plane when the market kicks off, you're screwed
6. You have constructed a trading strategy with a vaguely ridiculous 90% win rate, so almost by definition there will come a time every year or two when you get annihilated

So, bearing in mind that you don't know exactly what it is you're attempting to exploit, and you're not experienced with trading option portfolios and your method of calculating opportunity is probably wrong, you're going full steam ahead.

Now that's what I call spirit. Altogether now, oh say can you see ...

#3 is misconstrued. I use probability of touching as the chance I will bail before the option expires. It says nothing about where the underlying instrument price ends up at expiration. There is a huge difference between the two ideas.

#5 is not accurate. Contingency orders are put in place so if no-one is available to manually bail, the automation will, but not at as favorable a result.

#6 is interesting. How long a track record do you require before you categorize it as other than "vaguely ridiculous."

And you seem to ignore my analysis of what happens in the 10% of the time that things go against me. If you can argue with my analysis, do so. Otherwise, accept it and understand that when things go radically against my trades, I've managed to minimize the loss to less than a month's normal profit for all but the few times when I don't have both sides of an Iron Condor in place. And even in the worst, worst situations, the losses will likely erase at most two months of profit.

 

[MrGecko]

Howard, how do you decide which credit spreads to put on and which to leave alone?

 

[HowardCohodas]

Howard, how do you decide which credit spreads to put on and which to leave alone?

The Probability of Touching is the first criteria to be met. I started out at 10% and have inched my up until I became uncomfortable and then backed off a notch. The level is basically my personal risk tolerance. In back-testing, limits exceeding 25% were successful. However, the higher the limit, the closer you are to the underlying instrument current price, the more exciting the ride.

I then review the option chain for the Probability of Touching limit I settled on. My target is 10% return per Iron Condor. The returns from the CALL side and the PUT side are hardly ever symmetrical. If either side is > 5%, I put on the spread. The other side needs to be close to 5% but here I will be a little flexible depending on how rich the first side was. I don't think I've ever gone below 3%. Even though the second spread requires no additional margin, it still adds risk to the trade. If a spread meeting these requirements is not available, I come back another day to try again. My Dashboard identifies uncompleted Iron Condors to remind me to put completion into my trading plan for the next trading day.

It takes from days to weeks for an acceptable spread to complete the Iron Condor to materialize. I believe the only time I have been unsuccessful at eventually completing an Iron Condor is with the weeklies.

 

[HowardCohodas]

16 DEC 2010 Trading Plan

16 DEC 2010 Trading Plan

Any spreads with the short strike having a Probability of Touching of greater than 10% will be closed to avoid market gap risk. Others will be permitted to expire.

Opportunity
    Incomplete Iron Condors
        None

    Roll Candidates
        17.P - JAN 11  - PUT - SPX

    New Spreads
        None

Jeopardy
    Expiration - 0 days
        IC 6
        IC 8
        IC 12

 

[MrGecko]

The Probability of Touching is the first criteria to be met. I started out at 10% and have inched my up until I became uncomfortable and then backed off a notch. The level is basically my personal risk tolerance. In back-testing, limits exceeding 25% were successful. However, the higher the limit, the closer you are to the underlying instrument current price, the more exciting the ride.

I then review the option chain for the Probability of Touching limit I settled on. My target is 10% return per Iron Condor. The returns from the CALL side and the PUT side are hardly ever symmetrical. If either side is > 5%, I put on the spread. The other side needs to be close to 5% but here I will be a little flexible depending on how rich the first side was. I don't think I've ever gone below 3%. Even though the second spread requires no additional margin, it still adds risk to the trade. If a spread meeting these requirements is not available, I come back another day to try again. My Dashboard identifies uncompleted Iron Condors to remind me to put completion into my trading plan for the next trading day.

It takes from days to weeks for an acceptable spread to complete the Iron Condor to materialize. I believe the only time I have been unsuccessful at eventually completing an Iron Condor is with the weeklies.

OK, so these are the conditions for a spread to be a candidate for you to trade - but how do you determine if the price of the spread is over or undervalued comapred to the probability of touching?

 

[HowardCohodas]

OK, so these are the conditions for a spread to be a candidate for you to trade - but how do you determine if the price of the spread is over or undervalued comapred to the probability of touching?

It is not a consideration.

Time decay is all I want as long as it gives me sufficient return at an acceptable risk level.

 

[MrGecko]

It is not a consideration.

Time decay is all I want as long as it gives me sufficient return at an acceptable risk level.

OK... then where is your advantage?

You are betting on something only happening 1-in-10 times, but you are doing it indiscriminately; if this strategy is to have an advantage, you need to either bet on a 1-in-10 event where the payout is more than 10-1, or getting 1-in-10 prices for something that is actually 1-in-11 (or less).

Not to mention you are paying commissions and spreads for the privilege.

 

[HowardCohodas]

OK... then where is your advantage?

You are betting on something only happening 1-in-10 times, but you are doing it indiscriminately; if this strategy is to have an advantage, you need to either bet on a 1-in-10 event where the payout is more than 10-1, or getting 1-in-10 prices for something that is actually 1-in-11 (or less).

Risk Analysis