Watch HowardCohodas Trade Index Options Credit Spreads

A quick and dirty summary.
50 spreads opened.

36 Monthlies
13 Weeklies
1 Quarterly

33 spreads have been closed or expired.
4 spreads closed with a loss. (3.3%), (0.2%), (1.2%), and (30.3%)
29 spreads closed with a profit

24 Monthlies - Average 3.6%
9 Weeklies - Average 5.2%

4 weeklies will expire tomorrow. So far, I will likely let them expire rather than buy them back.

Since not all spreads were of equal money, the averages are probably misleading.

My account balance is up 49.9% since 8/1/2010 which is 11.8% per month.

Trading plan for Thu, 9 DEC 2010 from Dashboard

Hi Howard,

I appreciate how open you are about your intentions in this journal. In light of that, I'd like to ask a few questions and perhaps offer some constructive criticism in response (if I'm able to).

Is it fair to say that you believe your positive expectation at trade inception comes from the ability of the TOS probability calculation to give you a more accurate prediction of the index's future price distribution than the distribution expected by the market?

If yes, (and I don't mean this to sound sarcastic) isn't that a little hard to believe? Some of the best minds in academia and on wall street have been trying to accurately model this for decades (unsuccessfully). Not only that, but this would also be saying that the TOS calc is so much better than the market's estimate that the discrepancy is large enough to overcome commissions and bid/ask spread.

If no, then what is your source of positive expectation? Or said another way, what is causing the market inefficiency that is mispricing these option constructs? Is it that you believe the market systematically overprices risk premium?

Of course, you are under no obligation to address any of these but i think these could begin a discussion that may help as you consider trade evaluation, risk management, marketing, and perhaps the approach overall.

Thank you.

I believe some of your questions have been answered previously. Kindly read, or reread the initial post and the FAQ and if I have failed to adequately explain my thinking, I'll try to expand on it.

I look forward to a good Socratic dialog on my methods. We all learn something from it.

Only have a minute, but quickly here's what I think:

1. Options for the most part are fairly priced
2. Therefore, in order to have positive expectation in a non-directional option trade(s), one must be able to predict whether future volatility will be higher or lower than the market is currently pricing in. I highly doubt the TOS probability calculator has that capabilty - world's best kept secret if so.
3. Therefore by methodically selling cheap gamma every month, I think you have zero expectation before comm/slippage but considerably negative expectation after bid/ask and commissions are factored in.

Do you agree on these points?

1. Yes, but irrelevant to what I do.

2. Selling credit spreads, means that you are selling time high and buying is back low. Time will pass, so time value must go to zero. No magic here.

The TOS calculation of probability of touching is unrelated to anything you mention. And their model is very close to the one I developed. It serves my purposes perfectly, i.e. estimating the likelihood that a given strike would be reached during the period of time I would be in the spread.

3. I have no idea what you are getting at.

2. You are selling risk which is a function of time, not time itself. And there is absolutely no guarantee that you will be "buying it back low".

1. It absolutely is relevant as its the amount that you're compensated for the risk you are selling.

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Take this simple example:

1. 60 days of Risk is worth $10.00.

2. With 60 days to expiration option market makers bid $9.00 and offer $11.00 for this risk.

3. You sell it to them at $9.00 and pay $0.50 in commision. Netting $8.50.

4. Your expectation on this trade at inception is -$1.50

5. 50 days of risk is worth $8.25.

6. If you make it to day 50 without any adverse moves occurring yes you will have positive expectation of $0.25 at that point. But this is a huge IF...you state the certainty of time passing as if there was no risk during the period. In the long run you will lose -$1.50 on average for all these trades.

Where do we disagree in the context of this example?

09 DEC 2010 Trading Summary
Today was a good and a not so good day. The not so good first.
I had two unforced errors, one benign and one potentially risky. The benign error occurred when I was adding spreads to spread #35 to balance an additional PUT spread that I had added to this options series. When I did not get a fill at my chosen price, I lowered my price to resubmit. When the trade did not appear on the platform, I thought I had canceled rather than cancel and replace. I resubmitted and both filled.

Now my IC was unbalanced again. So I went to add the PUTS to rebalance and I misread the TOS chain column and put on a spread that is far riskier than my rules permit. Of course, I did not spot this until after the market closed when I was updating my journal. This was an unforced error because there were many clues laying around, like the unusual credit I received.

I'm still working on a method to prevent this kind of unforced error besides just a commitment to better focus and discipline.

Four weekly spreads expired today. Three I let expire, and one I bought back to avoid market gap risk.

Yield Summary

IC 20

Spread 44: 3.1%
Spread 43: 7.8%
As an IC: 11.4%

IC 21

Spread 45: 3.7%
Spread 46: 2.7%
As an IC: 4.8%

IC 12 Developed a roll opportunity