Watch HowardCohodas Trade Index Options Credit Spreads

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MrGecko said:
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?
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You seem to be having a hard time differentiating between an attempt at humor, teasing and a sincere question. Perhaps I should abandon the first two, as it seems to infuriate you rather than amuse you.

At any rate, I was slyly alluding to the choices available for volatility strategy that TOS uses to estimate probability of expiring and the probability of touching.

They are:
  1. Volitility Smile Approximation
  2. Individual Implied Volatility
  3. Fixed volatility per expiration date
 
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Whilst this looks unfriendly now, I think that these 2 will be gaussian copulating before long...
 
Monte Carlo Probability Calculator

I've likely mentioned this online calculator, so here is some additional detail and a link.

Monte Carlo Probability Calculator

This option probability calculator can be used to determine the probability the stock will ever break upper and/or lower price limits during the time specified. Most other option probability calculators will only calculate probability at option expiration. In order to manage an option position in real time, you need to know the probability of price hitting your upper and lower price limits any time while you hold the position.
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29 DEC 2010 Trading Plan

2010-12-28_Journal.png


29 DEC 2010 Trading Plan

PHP: 
Opportunity
    Incomplete Iron Condors
        26

    Roll Candidates
        None
        Spread 56 @ 1 day to expiration.

    New Spreads
        None
        NDX Weeklies @ 1 day to expiration

Jeopardy
    Probability of Touching
        None
        Both spreads in Iron Condor 13 are likely to be left to expire.

    Days Until Expiration
        Iron Condor 13 @ 1 day

    At Risk P/L
        None
 
I was wondering.

For those of you who have made considerable effort toward my education and been frustrated by my learning speed. Do you trade vertical spreads? If not, why not? If so, how do your methods differ from mine in a practical way? How about some examples?
 
Gecko, just let him get on with it. I just dipped back in to see how HC was getting on and was surprised to see that he's still succeeding at pushing people's buttons.

This is just another "Holy Grail" thread with a bunch of knobs, bells and whistles attached.

Very early on in my working life, I used to regard the price of a one touch binary as the probability of it happening (durr!!). I recall having a discussion with a quant, whereby I postulated that because a one touch had a premium of 10%, it meant it was 10% likely to trigger. The quant looked at me and said "No it isn't, it's the expected cost of hedging". Obviously, being young, dumb and full of, er.. anyway I argued the "tos" (geddit?) for a while until I realised I was talking sh1t.

The cost of an option = expected cost of hedging, not expected payout.
 
meanreversion said:
Gecko, just let him get on with it. I just dipped back in to see how HC was getting on and was surprised to see that he's still succeeding at pushing people's buttons.

This is just another "Holy Grail" thread with a bunch of knobs, bells and whistles attached.

Very early on in my working life, I used to regard the price of a one touch binary as the probability of it happening (durr!!). I recall having a discussion with a quant, whereby I postulated that because a one touch had a premium of 10%, it meant it was 10% likely to trigger. The quant looked at me and said "No it isn't, it's the expected cost of hedging". Obviously, being young, dumb and full of, er.. anyway I argued the "tos" (geddit?) for a while until I realised I was talking sh1t.

The cost of an option = expected cost of hedging, not expected payout.
Click to expand...

Food for thought. Thanks.

How about replying to my question in the post right before yours?
 
HowardCohodas said:
I was wondering.

For those of you who have made considerable effort toward my education and been frustrated by my learning speed. Do you trade vertical spreads? If not, why not? If so, how do your methods differ from mine in a practical way? How about some examples?
Click to expand...

Yes, I used to trade bucketloads of "vertical spreads", but it was for adjusting the risk profile of the book rather than anything else (and also to pay a bit of brokerage, in order to be entertained that evening).

To make money, you need to have a view and for that view to be mostly right. We still don't know what your view is, as you deny that options are mis-priced. You aren't directional, and you also deny that you have a secret probability calculator that tells you when options are out of whack, so all we are left with is that your view must be that you're a skilful options trader, in under less than six months.
 
meanreversion said:
Yes, I used to trade bucketloads of "vertical spreads", but it was for adjusting the risk profile of the book rather than anything else (and also to pay a bit of brokerage, in order to be entertained that evening).

To make money, you need to have a view and for that view to be mostly right. We still don't know what your view is, as you deny that options are mis-priced. You aren't directional, and you also deny that you have a secret probability calculator that tells you when options are out of whack, so all we are left with is that your view must be that you're a skilful options trader, in under less than six months.
Click to expand...

In later posts, as I gained understanding of what my entry criteria really meant, I stated that there was, in fact, a market bias built into the method. I do not derive a market bias outside of what the method gives me. The method has one embedded. Apparently the market (sum of all traders) telegraphs its bias in the way the options are priced.
 
HowardCohodas said:
Apparently the market (sum of all traders) telegraphs its bias in the way the options are priced.
Click to expand...

Er, this is completely incorrect. It's akin to suggesting that because the 1yr forward price of AUD/USD is below spot, the market expects the AUD/USD rate to go down.

Where DO you get your information from? Goodness me, try reading the classic options book by Hull.
 
meanreversion said:
Er, this is completely incorrect. It's akin to suggesting that because the 1yr forward price of AUD/USD is below spot, the market expects the AUD/USD rate to go down.

Where DO you get your information from? Goodness me, try reading the classic options book by Hull.
Click to expand...

Let me see if I've got this right. I can't have a workable system because I don't have a market bias.

But wait. The system has a built-in market bias.

But wait. This is all wrong because the market doesn't telegraph a bias.

Call me confused. What does account for the fact that when the market is moving in a given direction, the option prices make one side of an Iron Condor meet my entry criteria and other side does not? And when hours, days and sometimes weeks go by, and the market seems to turn around, the other side of the Iron Condor meets my criteria. What accounts for that? Do I have to be embedded in option theory to understand that the obvious is not really what is happening?
 
HowardCohodas said:
Let me see if I've got this right. I can't have a workable system because I don't have a market bias.

But wait. The system has a built-in market bias.

But wait. This is all wrong because the market doesn't telegraph a bias.
Click to expand...

Oh dear. The reason that the futures prices of AUD/USD are lower than the present is simply due to the interest rate differential.

Is interest rate differential your definition of market bias?

The reason the forward AUD/USD rates are below present rates is because AUD rates are higher than USD rates.

So, if Australia puts up its interest rate tomorrow, would the market bias then increase in favour of a weaker AUD? (I bet you're REALLY confused now..)
 
HowardCohodas said:
I am not well enough versed in futures theory to make the connection, so your example is, unfortunately, lost on me.
Click to expand...

Oh dear, oh dear, oh dear. This is really basic stuff now.

The asset with the higher interest rate has a lower future value than the one with the lower interest rate (AUD rates > USD rates).

It is cheaper to hedge a short AUD call position (because you earn carry on the delta hedge) than a short AUD put position (where you pay carry on the delta hedge), where both strikes are equidistant from the current spot rate.

Similarly, the derived percentage "probability" of hitting a high price in AUD/USD spot is generally lower than that of the low price, due to the hedging costs.

You've clearly never come across this, even though probability of touch is core to your strategy.

Yes, yes, I know, you're making money so far.

Carry on fella, I'm still rooting for you!
 
meanreversion said:
Oh dear, oh dear, oh dear. This is really basic stuff now.

The asset with the higher interest rate has a lower future value than the one with the lower interest rate (AUD rates > USD rates).

It is cheaper to hedge a short AUD call position (because you earn carry on the delta hedge) than a short AUD put position (where you pay carry on the delta hedge), where both strikes are equidistant from the current spot rate.

Similarly, the derived percentage "probability" of hitting a high price in AUD/USD spot is generally lower than that of the low price, due to the hedging costs.

You've clearly never come across this, even though probability of touch is core to your strategy.

Yes, yes, I know, you're making money so far.

Carry on fella, I'm still rooting for you!
Click to expand...

I appreciate these dialogs because I'm always looking over my shoulder to see what I've missed or what is about to bite me in my ASSets.

Sometimes pithy doesn't pay off.

I understand net present value. Even wrote a paper on it once. The connection I don't get is what this has to do with the bias the method seems to observe in finding an appropriate spread to sell.
 
Howard

How about reviewing the number of succesful positions you have thus far?

If you are applying the same strategy to 3 correlated markets - this is effectively the same play. In terms of where you got in, when you would lose & when you would win, they are the same. It's like a 'basket trade' isn't it?

As such - doesn't your 50+ trades actually come out to about 17 trades so far?

DT
 
DionysusToast said:
Howard

How about reviewing the number of succesful positions you have thus far?

If you are applying the same strategy to 3 correlated markets - this is effectively the same play. In terms of where you got in, when you would lose & when you would win, they are the same. It's like a 'basket trade' isn't it?

As such - doesn't your 50+ trades actually come out to about 17 trades so far?

DT
Click to expand...

Market action is a small element of success. So being correlated markets is not that important.

Each of the indexes I trade have a different personality with respect to things like bid/ask spreads, time to fill, granularity of limit orders, and more. These are far more important in terms of effort required to get good entries and to successfully manage them.

Here is another perspective that may interest you. A breakdown by index and series type (Weekly, Monthly, Quarterly).

Format - Total(Losses)

PHP: 
         W       M       Q   |   Tot
SPX      5       5(1)    4   |  14(1)
RUT      -      16(1)    -   |  16(1)
NDX     11(1)   14(1)    -   |  25(2)
-------------------------------------
Tot     16(1)   45(3)    4   |  55(4)

Bottom line... I think the experience represented is much closer to 50 than it is to 20.
 
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Typically when you put your opening spreads on, do they tend to be to the downside or upside of current market price? Or does it vary?
 
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