Watch HowardCohodas Trade Index Options Credit Spreads

[scose-no-doubt]

+1
On the other hand, I know more about Options, BSM and IC's than I did before this thread started.

👍

 

[meanreversion]

I'm not unsympathetic to trading option spreads as it's something I did frequently when on the sell side. However, the way in which it happened is very different from HC's approach.

Bank A would mark its flies and r/r such that (e.g.) a 3mth 15 delta/10 delta put spread was "worth" 0.7 vol. This is a spread it wanted to trade, and it would ask the broker to get a price.

The composite price then returned to Bank A might be something like 0.6/0.9 (in vol .. this is assuming vega neutral amounts of the spread to be traded).

Bank A would then bid 0.8 vol.. after a while, someone would show a 0.85 offer and perhaps, if bank A was aggressive enough, this is where it would start to trade.

So, the "theoretical mid" of the spread is 0.7, and bank A is now buying it at 0.85. This would then attract several sellers, banks B, C, D and E, for whom selling the spread at 0.85 would result in an instantaneous "profit" of 0.15 vol when the trade is booked, because their system has it worth 0.7.

But if bank A buys enough at 0.85, this means that the flies or the r/r has changed slightly.. if this is where the spread is trading, to mark your book at 0.7 is then just fiddling the numbers, unless you happened to be long the spread to begin with.

Anyway.. the trading of these spreads is marginal, even in industrial amounts. HC doesn't get close to this level of price efficiency, and then hopes for a bit of luck with managing the ensuing strikes.

As you say robster, we need to see how he handles a market shake out in order to determine his trading chops.

 

[meanreversion]

+1

What does "+1" signify?

 

[robster970]

What does "+1" signify?

Complete agreement - I second your opinion by adding 1 to it. Not common on these boards.

 

[meanreversion]

Hmm, wasn't familiar with that.. guess I'm not "hip" or "down with the homies" .. ?!?!

 

[robster970]

I don't think it's hip MR. I think I'm a long way from hip these days.

 

[meanreversion]

Closest I got to "HIP" was when I was selling my apartment last year. Cost £200 or something, what a waste of money.

 

[DionysusToast]

These spreads can go 100% offside overnight. In fact it is inevitable that this will occur.

The only question remaining is how devastating this will be to HCs account.

 

[scose-no-doubt]

As a negro I am always hip apparently.
I went for a job interview last year and although I maintained a professional demeanour throghout in regards to dress, posture and body language, whilst I was talking the interviewer insisted on nodding his head, smiling and saying "coooool".

 

[scose-no-doubt]

As I've asked before could he not use a VIX threshold that forces him to the sidelines? Is VIX reliable?

How would buying a cheap OTM call offset his risk to the downside?

 

[DionysusToast]

These spreads can go 100% offside overnight. In fact it is inevitable that this will occur.

The only question remaining is how devastating this will be to HCs account.

 

[robster970]

These spreads can go 100% offside overnight. In fact it is inevitable that this will occur.

The only question remaining is how devastating this will be to HCs account.

Depends on his risk per trade baselined against account (which he's not disclosing). I'm guessing that his combined exposure across all spreads baselined against account is probably about 50% because of the faith in being able to close at the 15% PoT threshold.

So I think he would be wiped out on something like the 6th May flash crash because of the correlation of the indices. I don't think he realises primarily through lack of exposure to just how severe it gets when there ain't anybody around to take the other side of your trade.

 

[robster970]

Closest I got to "HIP" was when I was selling my apartment last year. Cost £200 or something, what a waste of money.

Another government incentive to encourage you not to vote for them.

 

[meanreversion]

As a negro I am always hip apparently.
I went for a job interview last year and although I maintained a professional demeanour throghout in regards to dress, posture and body language, whilst I was talking the interviewer insisted on nodding his head, smiling and saying "coooool".

He may just have been a pot head.

 

[scose-no-doubt]

Possibly

 

[HowardCohodas]

I signed up to Carbonite a couple of months back. It took about a week for the machine to backup, and now (I believe) it backs up files occasionally. Are you a fan of this software?

Yes.

The backups go on continuously unless you interfere.

I was able to recover a file that I corrupted and continue my work with minimum delay.

I transferred nearly 50gbytes to my new computer without effort. Initially, I screwed up setting up Carbonite on the new computer. I got frustrated and transferred some files manually. Carbonite detected there was a problem, diagnosed it without communicating with me and sent me an email containing instructions for a quick fix that got me going again without fuss.

That's what I call good service.

 

[meanreversion]

quick push to the line howie, you're nearly legendary

 

[HowardCohodas]

The risk/reward looks fairly poor, but don't forget the crux of the system is that full loss is never allowed to develop, i.e. the stop out here would be around $8 ... that's the theory.

As I've said before, the way in which good-spread-gone-bad is handled is of overwhelming importance to this strategy. Furthermore, because HC places similar trades in 3 indices, if the market does tank, he'll be fighting fire all over the shop.

It's the primary reason I don't like this strategy, aside from the fact that I can't discern any positive expectancy. It exposes the trader to one of the strongest biases - allowing losers to run/can't admit to being wrong. HC has already given us an example where he had reached a cut out point, but then decided against it.. as luck would have it, the market then bounced.

You make many sound points here. Permit me some thoughts.

Limiting Losses
Limiting the losses to between 20% and 30% of the capital at risk remains untested by the circuit breaker I create for each spread. I place a contingency order to exit ATM if the price of the underlying is within 1% of the short strike. This should reduce the workload should the market tank or explode. Furthermore, I may not be available to manually trade at the time that market conditions get out of hand.

The effectiveness of my broker to execute these contingency orders is crucial but untested. At the moment, I can only rely on their reputation

3 indexes
Even under normal market conditions, the workload of managing 3 indexes at once surprises me. I have begun reevaluating whether I want to continue this practice as it was established to prepare for an as yet unrealized desire to teach these trading methods.

Although the circuit breakers should save me from disaster, I would have little opportunity to take advantage of the other half of the spreads reaching near maximum profit and roll them. Rolling adds significantly to the profit and therefore mitigates some of the risk of account loss.

Trader bias
I doubt that I am immune, even with my structured quality assurance process to correct trader errors. In a crisis, a thoughtful evaluation will not likely have time to overcome crisis management requirements.

I have proved to be pretty good in a crisis, both as a pilot, during my uncompleted training to become a medical first responder and several other general surprises in life. That does not guarantee I will be in a trading crisis and effort on my part to avoid hubris is important.

You mentioned the one trade that was on the verge of going bad that I managed to a small loss. I thought looking at the overnight futures before the market opened to decide whether to pull the trigger immediately was good practice. Apparently you do not. Could you elaborate further?

 

[HowardCohodas]

+1

I not sure whether HC understands just how correlated his 3 indices are. I also think that HC's trade mgmt under crisis has never really been tested and these two reasons alone for me question the viability of the strat.

On a more personal note, I am suspicious of a strat that has such a high win% simply because 'it does not feel right' in what we all know to be a -ve sum game.

On the other hand, I know more about Options, BSM and IC's than I did before this thread started.

I am also suspicious and I have also learned a lot.

 

[HowardCohodas]

As a negro I am always hip apparently.
I went for a job interview last year and although I maintained a professional demeanour throghout in regards to dress, posture and body language, whilst I was talking the interviewer insisted on nodding his head, smiling and saying "coooool".

In days gone by, especially in music and theater, it was Negroes and Jews. I don't think I'm considered hip any more. 😢