Watch HowardCohodas Trade Index Options Credit Spreads

[UgoDadeo]

Thank you Howard… I misunderstood the second post.

To help me understand, I might roll a spread as follows:

First leg:

Vertical Sell 1 SPX Feb11 1350 Put $ xx.xx credit
Buy 1 SPX Feb11 1375 Put

Later I close the position:

Vertical Buy 1 SPX Feb11 1350 Put $ yy.yy debit
Sell 1 SPX Feb11 1375 Put

And roll to a new position closer to the current price taking advantage of time decay:

Vertical Sell 1 SPX Feb11 1300 Put $ zz.zz credit
Buy 1 SPX Feb11 1325 Put

 

[arabianights]

These two are still highly correlated Howard - I think providing you accept that if one goes off on a tangent, the other will too then you know what you're dealing with.

If by trading the different indices you think you are distributing risk, then I think this is a false premise. If you're looking for mutiple trading opportunities and accept correlated risk then that's different.

There is a saying... at times of crisis all correlations go to 1

 

[counter_violent]

I've never seen as much energy expended on a thread as this one. One of my New Year's resolutions is to spend less time on t2w. This thread is my final vice. It's strangely compelling, probably because we all know how it's going to end.

There have been various strangely compelling threads over the years Here is another one.

http://www.trade2win.com/boards/options/23221-plain-vanilla-options-trades.html

 

[HowardCohodas]

There have been various strangely compelling threads over the years Here is another one.

http://www.trade2win.com/boards/options/23221-plain-vanilla-options-trades.html

Wasn't he proved a fraud and banned?

 

[HowardCohodas]

There is a saying... at times of crisis all correlations go to 1

Sounds like the progression from making things happen to watching things happen to wondering what happened.

 

[counter_violent]

Wasn't he proved a fraud and banned?

It's a huge thread Howard but well worth the effort. Good job the weekend is upon us !

 

[scose-no-doubt]

I've never seen as much energy expended on a thread as this one. One of my New Year's resolutions is to spend less time on t2w. This thread is my final vice. It's strangely compelling, probably because we all know how it's going to end.

You're not even on much!

 

[HowardCohodas]

I've never seen as much energy expended on a thread as this one. One of my New Year's resolutions is to spend less time on t2w. This thread is my final vice. It's strangely compelling, probably because we all know how it's going to end.

Must be why I sometimes feel burned out. :-0

 

[the hare]

Wasn't he proved a fraud and banned?

No he was banned for telling the truth.

Ironically, that thread should be quite educational for you Mr Socco was right, everything is known in advance.

 

[UgoDadeo]

Thank you Howard… I misunderstood the second post.

To help me understand, I might roll a spread as follows:

First leg:

Vertical Sell 1 SPX Feb11 1350 Put $ xx.xx credit
Buy 1 SPX Feb11 1375 Put

Later I close the position:

Vertical Buy 1 SPX Feb11 1350 Put $ yy.yy debit
Sell 1 SPX Feb11 1375 Put

And roll to a new position closer to the current price taking advantage of time decay:

Vertical Sell 1 SPX Feb11 1300 Put $ zz.zz credit
Buy 1 SPX Feb11 1325 Put

Howard -- If this is a reasonable representation of the "rolling" of one leg, what is the typical cost to close the position as indicated with the y debit? Maybe you could ballpark the answer in terms of capital at risk - $ 25.00 (e.g., 4%).

 

[HowardCohodas]

Howard -- If this is a reasonable representation of the "rolling" of one leg, what is the typical cost to close the position as indicated with the y debit? Maybe you could ballpark the answer in terms of capital at risk - $ 25.00 (e.g., 4%).

In your example, you wisely chose a 25 point difference between strikes even though SPX offers 5 point differences. Since the cost of the trade remains the same no matter how wide the short/long distance, 25 points represents a smaller percentage of the credit than a 5 point distance would.

The example above is a trade I would place. The yellow highlighted area represents the key considerations.
Max Profit of $1.85 is the credit received.
Buying Power Effect represents the capital at risk. ToS will round this number up to $2500 when quarantining my funds.

Each transaction; initial entry, close to roll, and reentry costs the same commission. In this example, that would total $5.90 times 3 or $17.70.

I should note that this example is using my paper trading account showing the ThinkOrSwim standard commissions. If you ask, you are likely to get better rates from almost any broker.

 

[UgoDadeo]

In your example, you wisely chose a 25 point difference between strikes even though SPX offers 5 point differences. Since the cost of the trade remains the same no matter how wide the short/long distance, 25 points represents a smaller percentage of the credit than a 5 point distance would.

The example above is a trade I would place. The yellow highlighted area represents the key considerations.
Max Profit of $1.85 is the credit received.
Buying Power Effect represents the capital at risk. ToS will round this number up to $2500 when quarantining my funds.

Each transaction; initial entry, close to roll, and reentry costs the same commission. In this example, that would total $5.90 times 3 or $17.70.

I should note that this example is using my paper trading account showing the ThinkOrSwim standard commissions. If you ask, you are likely to get better rates from almost any broker.

Thank you Howard.

This is all very interesting to me. Of course, I am sure you can tell these strategies are far outside of my understanding. I thought I had a handle on the process. But I see I really don’t.

In the opening vertical spread -

Since I was selling a put closer to the market than the put I was buying, I expected to collect a credit – I get paid as represented by the x credit listed in my first post.
​

When I close this spread to roll it “down the hill of probability”, I expected to pay a debit – It cost me money to get out as represented by the y debit in my post.
​

But if I understand your response – the closing trading does not cost any money, just commissions.
Thank you for your patience with my lack of understanding.

I am off to watch the kids play soccer!

 

[HowardCohodas]

Thank you Howard.

This is all very interesting to me. Of course, I am sure you can tell these strategies are far outside of my understanding. I thought I had a handle on the process. But I see I really don’t.

In the opening vertical spread -

Since I was selling a put closer to the market than the put I was buying, I expected to collect a credit – I get paid as represented by the x credit listed in my first post.
​

When I close this spread to roll it “down the hill of probability”, I expected to pay a debit – It cost me money to get out as represented by the y debit in my post.
​

But if I understand your response – the closing trading does not cost any money, just commissions.
Thank you for your patience with my lack of understanding.

I am off to watch the kids play soccer!

I was just focusing on the commissions of the transactions.

You were correct. It does incur a debit to close a spread before rolling it to an new one where you will receive a larger credit. I do them as two separate transactions. And I make certain there is a "good" spread to roll to before closing the one I have going.

 

[DionysusToast]

Indeed - so the .80c reward for our $25 risk is watered down somewhat when getting out. In fact commissions will be significant here - perhaps $1 in & $1 out BUT that is more than 2% because the total credit per contract is only $80.

So - perhaps 1 loser would take 40 winners to recoup a loss.

This is where we get back to MRs quote from Taleb on sample size.

When you have a 40:1 risk:reward ratio, then a sample size of 60 or 70 or even 100 trades is insufficient to draw any conclusions.

If you trade futures with a 1 tick target and 40 tick stop, you will win most of the time but your losing trades will set you back to break even (although commissions will kill you).

HC earlier on mentioned he'd trained friends & family in these techniques and that they were actively trading them.

To those people if you exist & if you are reading this. Consider getting out now - you have had a good run. It will not last. The string of 'winners' you have seen is not exceptional given your risks.

Do not let HCs ego convince you to stay in. Of course he is confident - it is just misplaced.

 

[HowardCohodas]

Thank you Howard.

This is all very interesting to me. Of course, I am sure you can tell these strategies are far outside of my understanding. I thought I had a handle on the process. But I see I really don’t.

In the opening vertical spread -

Since I was selling a put closer to the market than the put I was buying, I expected to collect a credit – I get paid as represented by the x credit listed in my first post.
​

When I close this spread to roll it “down the hill of probability”, I expected to pay a debit – It cost me money to get out as represented by the y debit in my post.
​

But if I understand your response – the closing trading does not cost any money, just commissions.
Thank you for your patience with my lack of understanding.

I am off to watch the kids play soccer!

In addition to my previous remarks, here is an example of the order confirmation dialog for buying back a spread that presumably has earned most of its potential profit.

A couple of additional thoughts.

The spreads that remain standing as expiration nears may not require commissions if they are allowed to expire instead of bought back. So far in my trading, over 90% of the spreads were allowed to expire. They were far enough away from the underlying instrument price that there was minimal chance of a gap to put them ITM between when trading stops and the spreads expire.

The 6.5% of return that commissions consume from my account are higher then they could be because I have been trading SPX options with $5 strike differences. Were I to create SPX spreads with greater strike differences, the commissions become a smaller percentage of the profit. The downside of larger strike differences is that they require more capital. My reason for trading SPX options spreads was to learn the differences in personality of the SPX from the RUT and NDX. Also to have real examples in my account of successful spreads with $5 strike differences.

 

[HowardCohodas]

I've never seen as much energy expended on a thread as this one. One of my New Year's resolutions is to spend less time on t2w. This thread is my final vice. It's strangely compelling, probably because we all know how it's going to end.

In order to keep you around this thread for longer then you planned , I am initiating two changes in my trading and money management.

First, I will eliminate trading spreads on SPX. Trading three indexes and keeping up with correspondence here, on other forums and on lists is straining my ability to fulfill my remaining obligations. Furthermore, the most recent monthly quality assurance assessment of the trader (me) and the strategy, indicates a recent increase in unforced errors. They have not yet harmed the account, but have unnecessarily increased the risk. This quality assurance assessment has provided me with an early warning that I must make some changes to survive, let alone thrive.

Second, I will be building up the capital reserve in this account from the 10% to 15% target I have now to 20% to 25%. I will do this without adding capital from other accounts. I will begin reducing the capital I commit to each spread. This will begin on the next expiration on Jan 20. This decision comes primarily as a consequence of advice I have received in this thread and books recommended by participants in this thread. The increase in capital reserves is meant in increase the likelihood that I will survive black swan days, or even worse, double black swan days.

Live long and prosper.

 

[meanreversion]

http://www.surlytrader.com/volatility-arbitrage/

The SPARBV graph is interesting. The conclusion of this piece seems to be that implied vol IS overvalued, although I'm not sure if they're factoring in commissions and bid/ask.

But the article then does itself a dis-service by saying "sell some call options". As we know from put-call parity, long stock and short call = short naked put. So I suspect it was written by someone who wanted to prove his own hypothesis. Nonetheless, this is the kind of research needed to back up whether the HC strategy has some kind of long term positive expectancy. I still say no, after all the bid/ask and commission are accounted for. Perhaps there's a more efficient way of doing it?

 

[HowardCohodas]

http://www.surlytrader.com/volatility-arbitrage/

Thanks for the link.

 

[HowardCohodas]

Any thoughts on The Art of Credit Derivatives: Demystifying the Black Swan to help me understand the risk characteristics of my strategy?

 

[meanreversion]

You shoulda done this research before .. !