Watch HowardCohodas Trade Index Options Credit Spreads

[MrGecko]

Beware: Rant!


Oh FFS Howard you are starting to p!ss me off. I spent enough time to be embarrassed looking for the "probability of touching" reference (which I added in the first place) to find out how it was derived. I am guilty, Howard - I am guilty of doing more than I should in order to help you.

I then (at least)attempted to explain to you why the trade you are taking is at odds with the trade you think you are taking. You chose** to ignore my perfectly reasonable post above in favour of posting more of... well more of the same, and nothing of any merit.

It strikes me as ironic that you often make references to your experience of being a pilot, and that - and I quote - "A pilot is always learning" - yet when someone explains something about option theory that is at odds with your existing understanding - I mean it's poetic - you stick your head in the sand, and ignore it.

Howard, you have had people like Martinghoul and Meanreversion try to explain to you why your strategy isn't what you think it is. You have also had guys like me, who have a rudimentary understanding of option theory (yet cursed with a curious mind) try to explain why what you think you're doing doesn't make sense.

You know, there are plenty of guys on this forum that would be grateful for the attention and advice that these two guys (MG and MR) could give on their option trading strategies. Me, and the rest of the bloody forum included. But you choose to eschew their guidance in lieu of what.. well of what you have convinced yourself.

Pretty much everyone that understands basic option theory and that has followed this thread understands that you do not appreciate the risks you are taking. You have had blokes that trade options for a living try to explain to you where you are going wrong. You have had blokes like me try to explain why what you think you are doing doesn't make sense, yet still you stick your head in the sand.

You remind me of BSD on another thread; Cherrypick the affirmative, ignore the rest.

** Choose would be appropriate here, if it were in the present tense (?)

 

[HowardCohodas]

Beware: Rant!


Oh FFS Howard you are starting to p!ss me off. I spent enough time to be embarrassed looking for the "probability of touching" reference (which I added in the first place) to find out how it was derived. I am guilty, Howard - I am guilty of doing more than I should in order to help you.

I don't mind a rant. It's good for the spleen.

My post was an attempt to enlarge the commentary as I was asked to do. That is a separate and parallel process from the education process you and a host of other worthies have attempted to impart on me.

Here is a thought. I am a teacher (stuff other than trading related) as well as a student. When I fail to get across my material, my first thought is that the source of the difficulty is me and I try to engineer a different approach. I was always impressed by the fact that there are two kinds of teachers evident when a student does not understand something. Those who respond by saying it differently and those who respond by saying it louder.

You are faced with a choice. If I'm not getting it, you have to decide that either I'm not educable (stubbornness or lack of IQ), or your approach is unsuccessful. Your choice here will be your guide for future intercourse with me.

 

[MrGecko]

I don't mind a rant. It's good for the spleen.

My post was an attempt to enlarge the commentary as I was asked to do. That is a separate and parallel process from the education process you and a host of other worthies have attempted to impart on me.

Here is a thought. I am a teacher (stuff other than trading related) as well as a student. When I fail to get across my material, my first thought is that the source of the difficulty is me and I try to engineer a different approach. I was always impressed by the fact that there are two kinds of teachers evident when a student does not understand something. Those who respond by saying it differently and those who respond by saying it louder.

You are faced with a choice. If I'm not getting it, you have to decide that either I'm not educable (stubbornness or lack of IQ), or your approach is unsuccessful. Your choice here will be your guide for future intercourse with me.

Yes, Howard, you are absolutely right. The reason you do not understand the risk you are taking in order to return the rewards you are making is that over four hundred and twenty two posts the community of trade 2 win haven't properly considered the possibility that they are bad teachers.

 

[DionysusToast]

Come on Howard - the posts above are very clear. I sincerely doubt you can't keep up.

Especially this:

Having gone over the ThinkOrSwim pdf about "Probability of Touching", I have learned that it is basically a confidence interval based on a normal distribution of stock returns using the front month Implied Volatility**. The Implied Volatility is derived from the last price of the option. There is where your circular reference is, you are looking at two functions of the same thing. In which case, it doesn't matter a scooby-doo which options you choose in your strategy, because the probability of touching and the option price will move in lock-step with one another. The laws of mathematics and arbitrage see to this.

Mr G has put in a fair amount of effort here. Don't just brush him aside.

 

[HowardCohodas]

Howard, this kind of thinking is going to bite you in the ar$e.

So you are saying that the statistics so far are irrelevant, inconclusive or misleading and I will eventually fail. What level of statistics would provide some substance to a case that the world as you know it does not cover all there is to know about options? Give me a target to shoot for.

Having gone over the ThinkOrSwim pdf about "Probability of Touching", I have learned that it is basically a confidence interval based on a normal distribution of stock returns using the front month Implied Volatility**. The Implied Volatility is derived from the last price of the option. There is where your circular reference is, you are looking at two functions of the same thing. In which case, it doesn't matter a scooby-doo which options you choose in your strategy, because the probability of touching and the option price will move in lock-step with one another. The laws of mathematics and arbitrage see to this.

Which pdf did you read? One or more of these or another one?
Jan 28 Probability of Stock Touching hosted by Tom Preston

Jan. 24, 2007 Understanding Probability Numbers hosted by Tom Preston

Sep 17 Probabilities hosted by Tom Preston

So, what your strategy is saying is:

I'll look at spreads where, by virtue of the strike price, expiry and the Implied Volatility, the Probability of Touching is < 10% and the net Credit is > 5% (These figures are arbitrary, and it follows that the options you are spreading are also arbitrary). Then you are saying "well I want to sell time and collect theta, so I will sell the spread for a credit" without realising you are also short Volatility.

Arbitrary!?! In the sense of your analysis or in the sense of actual results in more than just actual trading?

This makes sense if you think that the Implied Volatility used to derive the Probability of Touching and the option prices themselves is too high - if you think volatility is too high, then sell it. But you are selling Volatility systematically, without comparing Implied Volatility with expected realised Volatility.

If the Probability of Touching figure was derived using some volatility model, then you could be on to something - you would compare the probability of Touching produced by your model to the Probability of Touching implied by the option price, and take a position accordingly.

My Monte Carlo methods were. Why do you assume the ThinkOrSwim models were not?

But you aren't doing that.

** Implied Volatility, Howard, is pretty much what everybody understands. Probability of Touching is a homogenous*** function of Implied Volatility and hardly anybody has even heard of it.

*** yet to prove this, but it's an educated guess.

 

[HowardCohodas]

Yes, Howard, you are absolutely right. The reason you do not understand the risk you are taking in order to return the rewards you are making is that over four hundred and twenty two posts the community of trade 2 win haven't properly considered the possibility that they are bad teachers.

There is another possibility. Conventional wisdom may not apply.

 

[HowardCohodas]

Come on Howard - the posts above are very clear. I sincerely doubt you can't keep up.

Especially this:



Mr G has put in a fair amount of effort here. Don't just brush him aside.

I don't believe I have. I appreciate the hard work everyone has put into understanding what is going on. I believe, and you may not agree, that my understanding has come a long way because of the efforts of MrGecko and others.

There remains a gap in understand and efforts will continue to bridge that gap. I realize that it has frustrated MrGecko and vice versa. But good will is likely to prevail and we will continue to make progress.

 

[MrGecko]

There is another possibility. Conventional wisdom may not apply.

Right now howard, the possibility that you don't know what the c*ck you are on about, but think that, because you were an engineer and can fly a plane, you do understand, even though you don't, is a good 4 lengths ahead with less than a furlong to go.

 

[MrGecko]

So you are saying that the statistics so far are irrelevant, inconclusive or misleading and I will eventually fail.

Yes

What level of statistics would provide some substance to a case that the world as you know it does not cover all there is to know about options? Give me a target to shoot for.

It isn't a case of statistics; Integrate your PnL function .

Which pdf did you read? One or more of these or another one?
Jan 28 Probability of Stock Touching hosted by Tom Preston

Jan. 24, 2007 Understanding Probability Numbers hosted by Tom Preston

Sep 17 Probabilities hosted by Tom Preston

I read the first one

Arbitrary!?! In the sense of your analysis or in the sense of actual results in more than just actual trading?

Yes, the " level of your stomach acid" and " looking for 10%" are both arbitrary. They are metrics that suit you, but nobody in the market gives a sh!t. As far as option prices are concerned they are picked out of thin air.

My Monte Carlo methods were. Why do you assume the ThinkOrSwim models were not?

Because I actually took the whole 30 hours to understand basic option theory, then I took the whole 3 mins to read the bloody definition of what " Probability of Touching" was from the f*cking ToS website! Monte Carlo is bloody useless if you aren't using your own estimate of volatility!

 

[HowardCohodas]

Right now howard, the possibility that you don't know what the c*ck you are on about, but think that, because you were an engineer and can fly a plane, you do understand, even though you don't, is a good 4 lengths ahead with less than a furlong to go.

OK. So you did not respond well at my attempt at humor. Must be a Yank/Brit thing.

However, there are, what I believe, substantive questions in response to your presentation that could illuminate my understanding of your points. You might consider them as well.

Our posts passed each other, so I'll go back to reading your response. Thanks.

 

[HowardCohodas]

Monte Carlo is bloody useless if you aren't using your own estimate of volatility!

WTF!

TOS has three volatility models to choose from. What is wrong with picking one of them as all three seem well accepted in the industry?

 

[HowardCohodas]

Yes, the " level of your stomach acid" and " looking for 10%" are both arbitrary. They are metrics that suit you, but nobody in the market gives a sh!t. As far as option prices are concerned they are picked out of thin air.

Thin air seem a pretty arbitrary characterization given the results of the sensitivity analysis that I performed. There may be flexibility in the choices within a given range, but the ranges are not arbitrary.

 

[HowardCohodas]

It isn't a case of statistics; Integrate your PnL function .

You got me on this one. I'm clueless.

 

[MrGecko]

wtf!

Tos has three volatility models to choose from. What is wrong with picking one of them as all three seem well accepted in the industry?

HOLY COWWWWWWWWW

Howard, can you explain to the forum the difference between implied volatility and realized volatility?

 

[MrGecko]

Thin air seem a pretty arbitrary characterization given the results of the sensitivity analysis that I performed. There may be flexibility in the choices within a given range, but the ranges are not arbitrary.

Howard, you have said so yourself on this very thread (citation) "Originally I used a 10% Prob. of touching but I moved it up until my stomach acid levels were too high" .

These are arbitrary levels.

 

[MrGecko]

... I'm clueless.

On that we agree.

 

[HowardCohodas]

HOLY COWWWWWWWWW

Howard, can you explain to the forum the difference between implied volatility and realized volatility?

Yes. Can you? If so, be my guest.

 

[HowardCohodas]

On that we agree.

Funny but not very elucidating, is it?

 

[HowardCohodas]

Howard, you have said so yourself on this very thread (citation) "Originally I used a 10% Prob. of touching but I moved it up until my stomach acid levels were too high" .

These are arbitrary levels.

True, but so is my statement about the range. Sooooo...

I was trying to point out trade-offs not absolutes. The choice one makes when considering trade-offs may seem arbitrary, but are in fact an exercise we all do in everything we do. It should not be deprecated.

 

[MrGecko]

Yes. Can you? If so, be my guest.

Well, look - ToS doesn't have 3 models of volatility, it has 3 option pricing methods (Binomial, BS, and Stensland IIRC). What you think is volatility is actually the Implied Volatility that these option pricing functions produce through numerical methods.

A volatility model is something like GARCH or whatever.

why am I bothering?