Watch HowardCohodas Trade Index Options Credit Spreads

[HowardCohodas]

Yes, that's all that's left. Your edge is your ability to manage an options portfolio, based on four months experience.

Nine the way I calculate it. There are limitations in paper trading, but getting similar results should add some confidence to the conclusion.

 

[robster970]

there is robster. click risk management in his links. I'm trying to figure out why the downside is capped.

if so i might take up howards training offer as although I agree he has absolutely no idea of his real exposure the system obviously has +ve expectancy given his returns

ta.

 

[scose-no-doubt]

Howard can you provide me with a worked example of how your downside is capped?

 

[HowardCohodas]

Howard can you provide me with a worked example of how your downside is capped?

Since my risk analysis post did not resonate with you (I'll take the blame), how is this for an idea? Quarantined funds will be released over the weekend so I will be entering new spreads on Monday. Version 3.0 of the Dashboard now shows complete identification of the spreads. I will add to my daily review an assessment of the spreads. I don't know a priori which, if any, will crash. So we will watch things develop together. That way you can ask questions as we proceed.

The alternative is that I am developing an application that plays back the day by day life of a spread. This "movie" will include the data in the Dashboard and a chart of the underlying instrument as it unfolds each day so you can't peak ahead. I will be using this in my teaching and make it available to my students to play back any spread in my library which contains all my live trades and may contain some of my back-testing trades.

If you can wait for the "movie," we will be able to play back my failed spreads and analyse them and ask questions as the plot unfolds, even thought we know the ending.

 

[Martinghoul]

Given the positions that Howard runs, downside is capped by definition ... If you're short a call/put spread, or better yet, in an iron condor, your loss at expiry (note that this is not true for mark-to-mkt) is strictly bounded (excluding whatever sh1tshow you might encounter if the options are physically-settled).

Howard, I think you are missing some fundamental stuff here. As I said, I like your method, in general, but you're not applying it consistently. Moreover, you MAY be onto some real edge potentially (I don't exclude the possibility, unlike MrG and meanie), but you really need to be able to define it rigorously and you're definitely NOT doing that. Personally, I think you're actually a breath of fresh air compared to some really crazy peeps we've had discussions with on this site (remember 4x?). However, I am a bit alarmed in that a) you're not addressing issues with your strategy directly; b) you feel that you're ready to offer people education and coaching.

Just my Z$2c...

 

[scose-no-doubt]

Martinghoul, how the hell can losses be bounded to a max of 15% of premiums paid to construct the iron condor and also who comes up with these sh1t names?

 

[MrGecko]

The 15% bit comes from Howard... if the losses incurred on a position reach 15% (or whatever) of the maximum possible loss, that's when he will close the position and accept the loss. It's his stop loss.

 

[MrGecko]

Moreover, you MAY be onto some real edge potentially (I don't exclude the possibility, unlike MrG...

err... I don't think I've gone that far MG: IMO this strategy could have an edge if it was deployed at opportune moments when, in my simpleton terms, Implied volatility is too expensive. But what Howard is doing here is just deploying the strategy without any consideration for whether vol is cheap or expensive or bang on the nose.

I think it would also be easier if Howard ditched the whole "probability of touching" thing, as (I reckon) this is just going to be some homogenous function of volatility.

 

[Martinghoul]

Yeah, exactly... I don't know nuthink about no 15%. What I am saying is that, theoretically, if you're short a call/put spread, your loss at expiry is capped at (distance between strikes less premium recvd at the initial sale). Obviously, loss at expiry for a long call/put spread is bounded by the amount of premium you paid for it in the first place. So for an iron condor, which is a combination of a short call/put spread and a long put/call spread, loss at expiry also has to be bounded, by construction.

 

[Martinghoul]

err... I don't think I've gone that far MG: IMO this strategy could have an edge if it was deployed at opportune moments when, in my simpleton terms, Implied volatility is too expensive. But what Howard is doing here is just deploying the strategy without any consideration for whether vol is cheap or expensive or bang on the nose.

I think it would also be easier if Howard ditched the whole "probability of touching" thing, as (I reckon) this is just going to be some homogenous function of volatility.

That's exactly right, MrG... It's possible that Howard has actually stumbled upon a well-known class of strategies, based on medium-term mean reversion of implied-realized volatility spread (theoretically, happens because of some well-known investor biases, like excessive loss aversion, mental accounting etc). Needless to say, Howard doesn't seem to know it. It's only conjecture on my part that his "probability of touching" is some sort of a proxy for the measure of deviation of IV from a long-run mean. I think this is, possibly, what you're saying as well.

At any rate, as I said, I would be happy to discuss these things with Howard, 'cause I think it's interesting stuff actually. However, I am alarmed at some of the things he's doing.

 

[scose-no-doubt]

The 15% bit comes from Howard... if the losses incurred on a position reach 15% (or whatever) of the maximum possible loss, that's when he will close the position and accept the loss. It's his stop loss.

Hahahahahaha I thought it was a function of how he was constructing the IC, that the losses could not exceed 15% unless he let them ALL expire. I've been trying to get my head around this for weeks. Is this Gecko correct, Howwie?

 

[MrGecko]

a well-known class of strategies, based on medium-term mean reversion of implied-realized volatility spread (theoretically, happens because of some well-known investor biases, like excessive loss aversion, mental accounting etc).

What do I have to google to find more on that? Are there any standard books/papers on it?

 

[Martinghoul]

What do I have to google to find more on that? Are there any standard books/papers on it?

I can post the paper here, if you want... Or can PM/email it to you?

 

[scose-no-doubt]

Will I be able to understand it? If so gimme too.

 

[RPEX]

As far as i understand,
An IC by definition has quantifiable losses, the difference between the strikes of the credit spreads less the credit received. Obviously at expiration only one of those 2 credit spreads can be in trouble. Whilst you can measure the potential losses i think Howard's means of limiting them to a low figure is by rolling up the successful credit spread, but technically i'm not sure i would call these the same IC after the position adjustment.

i.e. If some index is at 500. We sell a 540/550 call spread for $1, and a 460/450 put spread for $1 after fees and paying the spread. So on the IC you have a credit of $2 but a maximum risk of $8. That is if one of the spreads settles at $10 then you lose $9 on it, but gain the $1 from the other side. Blah.

From my point of view this is still chasing pennies down the motorway, the $8 is simply too large. The tendency is to want to leg in directionally, but then you might as well play directionally and get better risk reward ratios for doing it. In terms of rolling up the winning side, i can't see how you do that without having a directional view - because you are explicitly saying "i think the underlying will trade in a tighter range". Take the above case, say we are a week away from expiry, the underlying is at 535, the put credit is as good as yours, you roll it up by i assume closing out the 460/450 spread (baying the spreads again) and open let's say a short 520/510 put spread, but because it's only a week away you only collect $1 for kissing it so close. I see the logic in going for the extra credit, it is perfectly reasonable, but if the call spread has been hammered it would take a lot of rolling up to make up for the loss. I have just made these numbers up, but the price of the call spread could be anywhere given the way gamma behaves near expiry. I think if my plan necessitated that i spend months on end being short gamma, i would want to learn about those risks. Nothing fancy, read Nateberg it's very accessible.

Also, the spreads on these things are quite wide, would you ever consider hedging with the underlying? The are A LOT of managed futures companies and a few hedge funds that do this exclusively, but a lot of them have intimate knowledge of the underlying and how it moves because they acknowledge that while you might be lucky and be delta neutral you are definitely not market and vol neutral.

I'm not sure if that is constructive criticism, or if it just sounds like rubbish, but i hope it helps, i think the way you are discussing this and persisting is quite enlightening by itself. Good luck.

 

[Martinghoul]

Well, I read the abstract, personally... The really gory bits are there to convince you that the analysis is sound and has covered all the various bases. It's attached. Otherwise, google "Option Returns and Volatility Mispricing".

 

[HowardCohodas]

Given the positions that Howard runs, downside is capped by definition ... If you're short a call/put spread, or better yet, in an iron condor, your loss at expiry (note that this is not true for mark-to-mkt) is strictly bounded (excluding whatever sh1tshow you might encounter if the options are physically-settled).

I bail before it gets ITM. The other risk is market gaps between close of trading and settlement. I use Probability of Touching here as well in inform my decision on bail or let expire.

Howard, I think you are missing some fundamental stuff here. As I said, I like your method, in general, but you're not applying it consistently.

How so?

Moreover, you MAY be onto some real edge potentially (I don't exclude the possibility, unlike MrG and meanie), but you really need to be able to define it rigorously and you're definitely NOT doing that.

It would seem that a deep understanding of my edge so that I can explain it eludes me. No argument there. I'm at a loss on how to overcome this shortcoming.

Personally, I think you're actually a breath of fresh air compared to some really crazy peeps we've had discussions with on this site (remember 4x?).

Thank you.

However, I am a bit alarmed in that a) you're not addressing issues with your strategy directly; b) you feel that you're ready to offer people education and coaching.

Just my Z$2c...

I am an engineer and do understand the aerodynamics of flight, however I don't believe that most students in flight school ever really do. Yet they turn into successful pilots.

I do however understand in great depth my management techniques. And that is what not only generates extra profit, but most importantly, it keeps me and my students our of serious trouble. If I did not believe this deeply, I would not consider teaching what I do.

 

[MrGecko]

I can post the paper here, if you want... Or can PM/email it to you?

Post it here, I can't see why not?

 

[Martinghoul]

Post it here, I can't see why not?

Snap... Done.

 

[HowardCohodas]

err... I don't think I've gone that far MG: IMO this strategy could have an edge if it was deployed at opportune moments when, in my simpleton terms, Implied volatility is too expensive. But what Howard is doing here is just deploying the strategy without any consideration for whether vol is cheap or expensive or bang on the nose.

I think it would also be easier if Howard ditched the whole "probability of touching" thing, as (I reckon) this is just going to be some homogenous function of volatility.

That supposes the volatility is not a part of Probability of Touching. But we know it is. So using Probability of Touching becomes a self adjusting method of choosing the strikes to form the credit spread. Along with the spread amount, of course.