Watch HowardCohodas Trade Index Options Credit Spreads

[HowardCohodas]

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?

Yep.

 

[HowardCohodas]

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.

I think I'm still educable. Don't give up on me yet.

 

[HowardCohodas]

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

Include me please.

 

[RPEX]

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.

I think unless you can dive right into this probability of touching metric, you should ditch it. What if TOS is down, or they have a bug, or change the calculation without notifying you, could seriously screw up your methodology.

 

[meanreversion]

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?

The names come from the payout diagrams. If you buy a call spread to the upside and sell a put to the downside, it looks like a "seagull" when you draw the payout at expiry. Similar for a condor, and from these expressions are derived "wings", referring to low delta options.

 

[HowardCohodas]

I think unless you can dive right into this probability of touching metric, you should ditch it. What if TOS is down, or they have a bug, or change the calculation without notifying you, could seriously screw up your methodology.

I'll return to my own calculations. Not as convenient, but beats relying on only one source of critical information.

 

[HowardCohodas]

The names come from the payout diagrams. If you buy a call spread to the upside and sell a put to the downside, it looks like a "seagull" when you draw the payout at expiry. Similar for a condor, and from these expressions are derived "wings", referring to low delta options.

 

[MrGecko]

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.

But Howard, there are two probabilities of touching: The probability of touching implied by the price of the option, and the actual probability of touching given everything in the universe that is inbetween now and expiry. Of course the latter we can never know, we can only estimate.

If you are saying "I think the actual probability of touching is 8%, and the options are trading with a probability of touching of 10%", then what you are doing makes perfect sense. But I can't see where you are comparing the probaility of touching implied by the option with what you think the actual probability of touching is.

Howard - when you were learning about options, did you come across the old...

You have a stock at $100 and a call option with a strike price of $100that expires tomorrow. The stock has a 60% chance of going to $101, and a 40% chance of going to $99. Interest rates are 0%

What is the value of the option?

..chestnut?

 

[MrGecko]

[PM me anyone who wants to see payout diagrams of my proprietary "spread-eagle" trading strategy]

 

[Martinghoul]

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.

Excellent, but this, in the grand scheme of things, is neither here nor there.

How so?

You're missing the simplest, most fundamental fact that there are ONLY two ways to make money in the mkts. You state that you're not doing either, which is extremely unlikely, if not impossible.

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.

It's simple. Try to directly address the specific questions that have been asked. Also, if I were you, I would try to stay away from the "I've generated this mighty return so far"/"my backtest looks great"/"it's worked fine for me so far" line of argument. It just doesn't mean much wrt option strategies.

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.

If you wanna be that sort of pilot, be my guest. However, are you honestly telling me that, given the choice of which sort of pilot you'd rather be, you would prefer to be one that doesn't get it? From my personal experience I can tell you, in all honesty, that the ones that don't understand DO get what's coming to them, sooner or later. This is a fundamental truth and I can give you countless examples.

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.

Maybe you do, but then why can't you explain it? Also, with all due respect, don't you think a bit more humility is in order here? I have been doing this sh1t for years and I KNOW for a fact that I don't understand risk management in as great a depth as I would like. I also wouldn't, for a single second, presume I know enough to teach someone, especially if that someone actually pays me money.

And, Howard, I am not giving up on you... Not at all. As I said, I find this stuff interesting and you're, honestly, a vast improvement over some of the coconuts we've had discussions with here. So it's all good.

 

[scose-no-doubt]

It's uncanny!

 

[meanreversion]

Maybe you do, but then why can't you explain it? Also, with all due respect, don't you think a bit more humility is in order here? I have been doing this sh1t for years and I KNOW for a fact that I don't understand risk management in as great a depth as I would like.

What's your point - are you suggesting that a full four months of trading options in the real world is insufficient to then start training others? C'mon.. options are a piece of p1ss. Delta schmelta.

 

[Martinghoul]

You know what else? I spent almost all of today discussing a particular issue with my boss, who's been in the mkt for 20+ years. And we discovered, to our shock and horror, that neither of us understands the issue very well and it's something that may have a significant impact on both our PNL and risk. So, while I know it's a platitude, but it is my personal experience that the more I learn, the more I realize how little I actually know.

 

[scose-no-doubt]

You know what else? I spent almost all of today discussing a particular issue with my boss, who's been in the mkt for 20+ years. And we discovered, to our shock and horror, that neither of us understands the issue very well and it's something that may have a significant impact on both our PNL and risk. So, while I know it's a platitude, but it is my personal experience that the more I learn, the more I realize how little I actually know.

which raises the question that i ask myself all the time. Who the f and where the f are these people that know all this stuff... :-S

 

[Martinghoul]

which raises the question that i ask myself all the time. Who the f and where the f are these people that know all this stuff... :-S

They don't exist, dude... It's impossible to know everything, but you should strive to know as much as you possibly can about the specific bits that you're doing.

The idea, as our man Howard correctly points out, is that you don't have to be a fully-qualified mechanic and a physics PhD to be a competent pilot. However, it's also true that you don't wanna be a total idiot and know nothing about these things, 'cause one day this knowledge might make a difference between life and death. So, as everything in life, it's a matter of finding the right balance, given costs and benefits.

My Z$2c...

 

[HowardCohodas]

A good pilot is always a student. And so it is in most of life, especially those aspiring to be a good trader.

 

[HowardCohodas]

16 DEC 2010 Trading Summary
Six spreads making up three Iron Condors expired today. None required buying back as all were safely out of market gap risk.

All three Iron Condors had roll opportunities during their life enhancing their total return.

IC 6 - 5 spreads
20  10/26/10  12/08/10  DEC 10  NDX  CALL  2325  2350  1.030   86%   3.7%   6.C  Closed with intent to roll
49  12/08/10  12/16/10  DEC 10  NDX  CALL  2275  2300  1.000  100%   4.2%   6.C  Expired
14  10/18/10  11/08/10  DEC 10  NDX  PUT   1825  1850  2.100   79%   7.2%   6.P  Closed @ 79% - Order Entry Error - Rolled to extend IC
26  11/08/10  12/07/10  DEC 10  NDX  PUT   2000  2025  2.300   89%   9.0%   6.P  Closed with intent to roll
47  12/07/10  12/16/10  DEC 10  NDX  PUT   2100  2125  1.750  100%   7.5%   6.P  Expired

Yield Summary
    20   3.7%
    49   4.2%
    14   7.2%
    26   9.0%
    47   7.5%

IC 6 yield as an IC 41.6%

IC 8 - 5 spreads
21  10/27/10  12/16/10  DEC 10  RUT  CALL   800   810  0.500  100%   5.3%   8.C  Expired
16  10/18/10  11/23/10  DEC 10  RUT  PUT    590   600  0.950   86%   9.1%   8.P  Closed @ 86% - Rolled to reform IC
37  11/23/10  12/03/10  DEC 10  RUT  PUT    650   660  0.920   85%   8.6%   8.P  Closed @ 85% gain - Rolled to reform IC
42  12/03/10  12/10/10  DEC 10  RUT  PUT    700   710  0.750   87%   7.0%   8.P  Closed with intent to roll
57  12/13/10  12/16/10  DEC 10  RUT  PUT    740   750  0.650  100%   7.0%   8.P  Expired

Yield Summary
    21   5.3%
    16   9.1%
    37   8.6%
    42   7.0%
    57   7.0%

IC 8 yield as an IC 51.5%

IC 12 - 3 spreads
41  12/01/10  12/16/10  DEC 10  SPX  CALL  1265  1270  0.250  100%   5.3%  12.C  Expired
29  11/09/10  12/09/10  DEC 10  SPX  PUT   1125  1130  0.500   90%  10.0%  12.P  Closed with intent to roll
51  12/09/10  12/16/10  DEC 10  SPX  PUT   1190  1195  0.300  100%   6.4%  12.P  Expired

Yield Summary
    41   5.3%
    29  10.0%
    51   6.4%

IC 12 yield as an IC 25.0%

 

[HowardCohodas]

17 DEC 2010 Trading Plan

Opportunity
    Incomplete Iron Condors
        None

    Roll Candidates
        15.P - JAN 11 - NDX
        17.P - JAN 11 - SPX

    New Spreads
        Weeklies available

Jeopardy
    Probability of Touching
        None
        
    Days Until Expiration
        None
        
    At Risk P/L
        None

 

[HowardCohodas]

17 DEC 2010 Trading Summary

Three spreads were entered with funds made available for the expiration of spreads.

58   NDX   M   FEB 11    2000   1975   1.950   22.P
59   RUT   M   FEB 11     685    675   0.830   23.P
60   NDX   W   DEC4 10   2175   2150   1.010   24.P

20 DEC 2010 Trading Plan

Opportunity
    Incomplete Iron Condors
        24.P
        22.P
        23.P

    Roll Candidates
        13.C
        15.P

    New Spreads
        SPX DEC4 10
        SPX FEB 11

Jeopardy
    Probability of Touching
        None

    Days Until Expiration
        24.P

    At Risk P/L
        None

 

[HowardCohodas]

I notice the views keep increasing even though I have not posted for several days. I apologize for falling behind. Some responsibilities in my personal life required attention.

The Dashboard picture is up to date.

I have purchased the domain name Howards-T2W-Dashboard.com to be used to provide live access to my dashboard for all who read this thread. This will avoid any concern about providing an advertising link to my upcoming commercial enterprise.

This will save me the trouble of capturing and uploading an image, but it will also give every user access to all the control buttons I use. I would guess that it will be the first or second week of January when this becomes available.

I'll try to resume the daily trading summary and trading plan shortly (next week).

Thank you all who continue to read this thread.