Watch HowardCohodas Trade Index Options Credit Spreads

[HowardCohodas]

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?

I'm reminded of the joke about a guy who was asked if he smoked after sex and responded, "I don't know, I never looked."

However, I suspect that if a spread on one side of the underlying instrument price meets my criteria and the other side does not, if I looked at the chart it would show some trending.

 

[meanreversion]

I'm just wondering if you're using flat vol for probability, i.e. not allowing for skew (risk reversal or butterfly). This would tend to make the spreads on the downside look more attractive, I would imagine.

 

[HowardCohodas]

I'm just wondering if you're using flat vol for probability, i.e. not allowing for skew (risk reversal or butterfly). This would tend to make the spreads on the downside look more attractive, I would imagine.

You have piqued my interest. This is something I will pay attention to as the new month's opportunities present themselves.

Thanks for the idea.

 

[meanreversion]

You have piqued my interest. This is something I will pay attention to as the new month's opportunities present themselves.

Thanks for the idea.

You miss the point comletely. If your TOS probability calculator uses the ATM vol, it's always going to present trading "opportunities" - because it's using the wrong vol.

Over the last 3-6 months there is no question that micro-delta options in stock indices have not really justified their 'pump', after the May 6 flash crash. Your strategy is unwittingly taking advantage of that.

 

[HowardCohodas]

DT,

Here is some additional information on the closed spreads to date.

Of the 55, 3 are part of a series that has not yet expired.

The remaining 52 closed spreads were part of 20 series. 19 series were profitable, 1 was a loss.

4 series had 1 spread (Iron Condor not formed)
8 series had 2 spreads
2 series had 3 spreads
4 series had 4 spreads
2 series had 5 spreads

Average 2.6 spreads per series
92% of the spreads were part of an Iron Condor
95% of the series were profitable
93% of the spreads were profitable

Month on month P/l assuming no more trades for DEC; 7.4%, 7.7%, 11.3%, 11.2%, 14.9%

A significant part of December's performance (maybe 2 of the 15 percentage points) is due to weeklies which I still have in pre-production mode (small money). Even small money with significant returns every week has an impact on total performance when the monthlies have a 60 day cycle.

I'm still worried I may have missed something or something is likely to sneak up on me and take a bite out of my ASSets. Some very smart people have warned me of this inevitability. Continued vigilance is required. Continued learning is required. Although some here may think I'm not educable.

 

[HowardCohodas]

You miss the point comletely. If your TOS probability calculator uses the ATM vol, it's always going to present trading "opportunities" - because it's using the wrong vol.

Over the last 3-6 months there is no question that micro-delta options in stock indices have not really justified their 'pump', after the May 6 flash crash. Your strategy is unwittingly taking advantage of that.

That may be true, but I also need to account for the performance during paper trading which included the flash crash and the back-testing with 5 years of data. With your insights, I'll need to look more closely at my data that I reviewed in summary but not in detail except during debugging.

It is also something to pay attention to as I perform quality assurance tests on strategy performance.

Also, some strategy elements, like weeklies, did not go to back-testing, but started with paper trading and are now in small money trading mode.

 

[HowardCohodas]

29 DEC 2010 Trading Summary - 30 DEC 2010 Trading Plan

29 DEC 2010 Trading Summary - 30 DEC 2010 Trading Plan

The summaries and plans are pretty formulaic. Today I'll leave it as an exercise to the reader to determine the trading results from yesterday by comparing the dashboard from yesterday's plan and today's entry. Likewise, it should be relatively easy to determine today's plan from the dashboard in this post.

I will answer specific questions to help you interpret the Dashboard if you have not tried to do so with my usual commentary.

 

[meanreversion]

What software are you using to backtest option strategies? That's fairly advanced stuff, as you either need to have a mountain of data about all option prices, or to simply make assumptions.

 

[HowardCohodas]

What software are you using to backtest option strategies? That's fairly advanced stuff, as you either need to have a mountain of data about all option prices, or to simply make assumptions.

My own, of course.

When I got down to doing serious testing, I used TOS ThinkBack to get the end of day data, including Probability of Touching for the RUT and the SPX. If I ever rerun the tests, I'll also use the data I've been saving for the NDX. I may also extend it to weeklies as I don't yet have the experience of seeing these perform over at least one market cycle.

My favorite reference in this area is "Design, Testing, and Optimization of Trading Systems" by Robert Pardo.

This was done before I discovered Prodigio, so I can't speak to the efficacy of using it in terms of rapid development. I wrote it in PHP (I was once a member of the PHP QA team) and run it the server that hosts my websites (GoDaddy at the moment).

For automated access to data for testing and to populate my online Dashboard, I had hoped to get a FIX account from TOS, but that availability to retail traders has been suspended pending decisions by TD Ameritrade. I am informed that this access will not be available in the future.

Back-Testing has considerable limitations and I only use it to qualify strategies for paper trading (which also has limitations). I attempt to avoid curve fitting by separating my data set into two non-contiguous sets so that the strategy can be developed on one set and tested against data it has never seen. If the data set is sufficiently large to cover several market cycles and the testing/validating cycle does not become a close sister to developing on just one data set, then curve fitting is likely avoided. Paper trading helps confirm the results as it is a test-forward process. For me, small money trading is the only confirming proof.

 

[HowardCohodas]

30 DEC 2010 Trading Summary

30 DEC 2010 Trading Summary

No Trades.

Iron Condor 13 expired. Profit profile:
Spread 56 - 3.5%
Spread 30 - 6.9%
Spread 54 - 8.4%
Spread 66 - 4.6%
As an Iron Condor: 28.6%

 

[HowardCohodas]

31 DEC 2010 Trading Plan

31 DEC 2010 Trading Plan

Any questions?

 

[HowardCohodas]

31 DEC 2010 Trading Summary

31 DEC 2010 Trading Summary

When coming up with my trading plan for today, I forgot that new weeklies would become available.

There were no trades from my plan, but I opened the following credit spread:
SPX JAN1 11 1225/1200 PUT spread for $1.10.

 

[meanreversion]

Sorry, what expiry is that? Also, aren't those strikes further apart than normal?

 

[HowardCohodas]

Sorry, what expiry is that? Also, aren't those strikes further apart than normal?

JAN1 11

Thanks for the heads-up. I corrected it in the original post.

 

[HowardCohodas]

DEC 2010 Performance Report

 

[meanreversion]

So is that +50% so far, roughly?

 

[HowardCohodas]

So is that +50% so far, roughly?

64.6% with compounding.

 

[meanreversion]

And on the Jan 1225/1200 spread, what is the max possible loss (deducting prem) in % of your total account?

 

[HowardCohodas]

And on the Jan 1225/1200 spread, what is the max possible loss (deducting prem) in % of your total account?

Total loss would represent about 2.6% of my account. A circuit breaker loss (20% to pull the trigger, call it 30% at fill) would represent less than 1%.

 

[meanreversion]

Hmm, and the prem as % of your account is how much, 0.3% or something?