Watch HowardCohodas Trade Index Options Credit Spreads

[MrGecko]

(I don't think the links in your post, or in your signature, are working Howard)

 

[HowardCohodas]

(I don't think the links in your post, or in your signature, are working Howard)

I just checked. All worked perfectly. I'm using Firefox.

At any rate the Risk Analysis post is # 155 in his thread.

Anyone else having difficulty with the links? They all are to posts in this thread.

 

[MrGecko]

Risk Analysis

Sorry Howard, but I don't quite see how your "Risk Analysis" determines whether a particular trade is worth the risk.

You aren't trading an arbitrage strategy, so at some level you are speculating. But you haven't explained what you are speculating on.

 

[scose-no-doubt]

Howard is speculating that he can earn theta and that in the event that the sh1t his the fan through whatever unforeseen event in the greeks, his puts/calls will offset each other resulting in a loss that cannot exceed 15% of total invested in said spread/IC.

Am I correct, Howard?

 

[HowardCohodas]

Sorry Howard, but I don't quite see how your "Risk Analysis" determines whether a particular trade is worth the risk.

You aren't trading an arbitrage strategy, so at some level you are speculating. But you haven't explained what you are speculating on.

I am depending on the certainty that time will pass and the options making up the spreads will expire. I don't see why it has to be more complicated than that.

If we take the Probability of Touching as a proxy for the chances I will suffer a loss on the spread, then simple Mathematical Expectation calculations tell you if the combination of Probability of Touching and credit received are expected to be profitable.

Post # 172 in this thread.

 

[HowardCohodas]

Howard is speculating that he can earn theta and that in the event that the sh1t his the fan through whatever unforeseen event in the greeks, his puts/calls will offset each other resulting in a loss that cannot exceed 15% of total invested in said spread/IC.

Am I correct, Howard?

Close enough.

 

[MrGecko]

Howard is speculating that he can earn theta and that in the event that the sh1t his the fan through whatever unforeseen event in the greeks, his puts/calls will offset each other resulting in a loss that cannot exceed 15% of total invested in said spread/IC.

Am I correct, Howard?

Yes, but the theta that he earns needs to be enough to compensate him for this risk, and I can't see how Howard is determining if this is the case or not.

 

[MrGecko]

I am depending on the certainty that time will pass and the options making up the spreads will expire. I don't see why it has to be more complicated than that.

If we take the Probability of Touching as a proxy for the chances I will suffer a loss on the spread, then simple Mathematical Expectation calculations tell you if the combination of Probability of Touching and credit received are expected to be profitable.

Post # 172 in this thread.

So - when I asked whether the price of the spread was a consideration in your strategy, and you said "no", you actually meant "yes" because you define the positive expectancy of your strategy as:

[ 100% - probability of touching * max win ] - ["prob. of touching * [max loss]

which, as you would expect, should equal zero in efficient markets (otherwise, loosely speaking, it's arbitrage).

But the positive expectancy you achieve in your analysis is based on assumptions like:

* You will always be able to cap your max loss at 30% of max possible loss
* you always recieve maximum possible profit for winning trades
* no commissions

which, it seems to me, are pretty unrealistic expectations.

 

[scose-no-doubt]

@ gecko http://www.trade2win.com/boards/tra...dex-options-credit-spreads-4.html#post1351882

* You will always be able to cap your max loss at 30% of max possible loss

As a maths and options newb this is the bit I can't get my head around...

Howard, does your risk management strategy for capping losses by offsetting positions not assume and require that all of your puts and calls will have the same delta?

 

[MrGecko]

I am depending on the certainty that time will pass and the options making up the spreads will expire. I don't see why it has to be more complicated than that.

Yes, Howard, time will continue to pass. As such, options that cease to exist at some specified point in the future will, eventually, cease to exist.

Eu-f*cking-reka.

Geez, wish I had got into the options game earlier. Apparently all you have to do is bet that time will continue to pass and you're quids in!

 

[meanreversion]

What Howard refuses to admit to us and perhaps to himself is that his belief is that options are systematically overpriced.

If this is not the case, then this strategy (by definition) has negative expectancy, once bid/ask and commissions are taken into account.

To keep coming out with the "well I've been making money so far" line is simply sticking your head in the sand.

As I mentioned before, the cognitive bias which Howard is now experiencing is the "sunk cost" bias. He has invested a considerable amount of time and energy now, so even if he is starting to realise the flaws, he will plough on regardless. It's similar to not stopping out of a trade when you should.

 

[MrGecko]

What Howard refuses to admit to us and perhaps to himself is that his belief is that options are systematically overpriced.

That is what you would think judging by his strategy, but to be honest I don't think Howard understands that one is synonymous with the other.

 

[meanreversion]

Well he has clearly stated that his return comes from "earning time decay", so in the long run this can only be profitable if options are systematically overvalued.

 

[scose-no-doubt]

Why do they have to be over valued? Why can't he just be willing to shoulder that risk on an expiry to expiry basis?

Also, MR, is an Iron Condor delta neutral?

 

[meanreversion]

Well, when these spreads are entered I would imagine they are delta neutral. But the system is short gamma, so the delta will always change adversely when spot moves. As the short strike nears expiry, the short gamma will start to increase.

The premium of an option is the expected cost of hedging it. So, if the strategy is consistently short gamma, then over time you would expect the time decay earned to be exactly offset by the cost of delta hedging the positions.

It doesn't really matter whether you sell ATM straddles, or low delta strangles, or condors.. the principle is always the same. The only way this strategy can work in the long run is if options are systematically overvalued.

Howard, what you should start doing is looking at historical vol vs implied vol. This is akin to comparing apples to pears, but it will give you an idea of when implieds are very high/low relative to historicals. Having said that, when this divergence occurs, it's usually for a reason (e.g. big event coming up, holidays, more option buyers than sellers) so it's only a rough guide.

 

[HowardCohodas]

As a maths and options newb this is the bit I can't get my head around...

Howard, does your risk management strategy for capping losses by offsetting positions not assume and require that all of your puts and calls will have the same delta?

Once all Iron Condors are complete, the portfolio will be delta neutral. While they are incomplete it will not be. But the unbalance occurs early in the 60 day cycle, so there is time to fix that. Weeklies are another story. They are still in preproduction.

 

[HowardCohodas]

What Howard refuses to admit to us and perhaps to himself is that his belief is that options are systematically overpriced.

Why do options have to overpriced for the spread to offer a yield of 5% for 60 days. Connect the dots for me.

If this is not the case, then this strategy (by definition) has negative expectancy, once bid/ask and commissions are taken into account.

That's a leap in math that eludes me. There is the obvious accordion affect, i.e. if all options are overpriced, then the separation between each strike increases. And similarly if they are all underpriced. But what do we find? The options on one side of the underlying instrument price will be spaced generously and the options on the other side will be compressed. Overpriced, underpriced, what?

To keep coming out with the "well I've been making money so far" line is simply sticking your head in the sand.

If that's the conclusion you come to with all the analysis I've provided, than I'm not as good a teacher as I thought I was.

As I mentioned before, the cognitive bias which Howard is now experiencing is the "sunk cost" bias. He has invested a considerable amount of time and energy now, so even if he is starting to realise the flaws, he will plough on regardless. It's similar to not stopping out of a trade when you should.

That's one explanation.

Another might be that you just haven't understood it properly.

I'm willing to learn, but flat statements like "by definition" and "this can only be true if" without any reasoning behind them have not proved very convincing.

 

[HowardCohodas]

That is what you would think judging by his strategy, but to be honest I don't think Howard understands that one is synonymous with the other.

Some reasoning behind that would be helpful in converting competing monologues to a dialog.

 

[HowardCohodas]

Well he has clearly stated that his return comes from "earning time decay", so in the long run this can only be profitable if options are systematically overvalued.

What's your reasoning behind such a statement of fact.

 

[robster970]

Howard - can you explain is a short paragraph the essence of why you're method has positive expectation instead of referring back to links and other posts? I'm really struggling to understand how you're doing this and I don't think I'm alone either. Is it mispricing? Is it directional? Is it something else?