Watch HowardCohodas Trade Index Options Credit Spreads

DionysusToast · Nov 27, 2010, 8:54am

Here's where I'd worry.

You are using a mathematical model to guide you as to the probability of a price range not being hit. It appears you have total faith in mathematical models.

Nobel prize winning mathematicians put forward a model that was adopted globally that was proven to be flawed. The flaw was in the assumptions fed into the model. The outcome was catastrophic.

Why is it that you believe in mathematical models so much? Do you believe that the probability in the TOS indicator you use will turn out to be valid at all times? How much does your system rely on life not throwing you a curveball?

Do you know something that Nobel price winning mathematicians do not ?

I have heard of people trading against options pricing models to take advantage of potential flaws but it appears you are trading with the models yet expecting to make a long term gain.

meanreversion · Nov 27, 2010, 9:17am

I've not gone into the strategy in too much detail yet, but are you computing probability using Black Scholes?

A one touch binary option will have a premium as percentage of payout, e.g. it might cost 25% to buy a 1mth 1.28 one touch in EUR/USD (I'm just guessing). This percentage does not represent the probability of anything, rather it reflects the anticipated cost of hedging (this is true for all option prices).

DionysusToast · Nov 27, 2010, 9:22am

MR - My understanding is that the probability of touching does not come from any analysis. Rather from an indicator on a trading platform.

Quote:

Then I learned about TOS and became interested because of their deep experience in options and their feature-rich platform. As I was learning the platform, I discovered they had a probability of touching estimate as one of their built-in functions that could be added as a column in the option chain presentation. Their answer was close enough to mine that I abandoned mine and use theirs. In talks with TOS, I'm informed that the calculation is proprietary. And I have found no similar calculation in other platforms I have looked at.

HowardCohodas · Nov 27, 2010, 10:30am

Quote:

Originally Posted by DionysusToast

Here's where I'd worry.

You are using a mathematical model to guide you as to the probability of a price range not being hit. It appears you have total faith in mathematical models.

Not so much. I use the "Trust, but verify" approach.

Quote:

Originally Posted by HowardCohodas

There are two key parts to a trading system; the strategy and the trader. Each must be a good performer to achieve trading success. And each must be continuously assessed to assure top performance. The journal is used for both of these tasks. The journal is all about quality assurance. Evaluating the strategy and the trader for any degradation in performance so that action can be taken before serious damage is done.

HowardCohodas · Nov 27, 2010, 10:34am

Quote:

Originally Posted by meanreversion

I've not gone into the strategy in too much detail yet, but are you computing probability using Black Scholes?

A one touch binary option will have a premium as percentage of payout, e.g. it might cost 25% to buy a 1mth 1.28 one touch in EUR/USD (I'm just guessing). This percentage does not represent the probability of anything, rather it reflects the anticipated cost of hedging (this is true for all option prices).

Full explanation of Probability of Touching as I derived it - FAQ #3. Link is signature.

HowardCohodas · Nov 28, 2010, 8:32am

Iron Condor 14 consisting of spreads 31 & 32, expired worthless for a return of 12.6%

IC 14 was a weekly series option. It was traded under preproduction constraints of only using small money. I'm still getting my sea legs with weeklies so I have not yet upgraded them to production status (serious money). I need to have a weekly trade cause me management concern to see if my rules handle it before moving to full production.

Code:

NDX   NOV4 10

Spread 
   31         CALL      6.8%
   32         PUT        5.0%

As an IC                12.6%

DionysusToast · Nov 28, 2010, 10:26am

When you say 14.7% - is that 14.7% of your reduced account size or 14.7% of risk for the trade ?

On a per-option contract basis, what was your dollar risk, dollar return & dollar fees for this trade ?

We don't need to know how many contracts, just nice to have an idea of the risk & reward without getting the calculators out...

Hotch · Nov 28, 2010, 11:50am

I would carry on with your own calculations tbh. TOS might of made some epic **** up in their % of touch.

Nov 27, 2010, 8:54am	#25
DionysusToast Legendary Member Member Since Dec 2009 5,501 Posts	Re: Watch HowardCohodas Trade Index Options Credit Spreads Here's where I'd worry. You are using a mathematical model to guide you as to the probability of a price range not being hit. It appears you have total faith in mathematical models. Nobel prize winning mathematicians put forward a model that was adopted globally that was proven to be flawed. The flaw was in the assumptions fed into the model. The outcome was catastrophic. Why is it that you believe in mathematical models so much? Do you believe that the probability in the TOS indicator you use will turn out to be valid at all times? How much does your system rely on life not throwing you a curveball? Do you know something that Nobel price winning mathematicians do not ? I have heard of people trading against options pricing models to take advantage of potential flaws but it appears you are trading with the models yet expecting to make a long term gain. __________________ I cannot see., however why we should expect to find a "system" which will work in the stock market; surely the possibilities of profits for the student justify the time and effort required to learn market interpretation. Humphrey B Neill - 1931

Nov 27, 2010, 9:17am	#26
meanreversion Legendary Member Member Since Jan 2009 3,398 Posts	Re: Watch HowardCohodas Trade Index Options Credit Spreads I've not gone into the strategy in too much detail yet, but are you computing probability using Black Scholes? A one touch binary option will have a premium as percentage of payout, e.g. it might cost 25% to buy a 1mth 1.28 one touch in EUR/USD (I'm just guessing). This percentage does not represent the probability of anything, rather it reflects the anticipated cost of hedging (this is true for all option prices).

Nov 28, 2010, 8:32am	#30
HowardCohodas Legendary Member Member Since Sep 2010 1,872 Posts	Iron Condor 14 Analysis Iron Condor 14 consisting of spreads 31 & 32, expired worthless for a return of 12.6% IC 14 was a weekly series option. It was traded under preproduction constraints of only using small money. I'm still getting my sea legs with weeklies so I have not yet upgraded them to production status (serious money). I need to have a weekly trade cause me management concern to see if my rules handle it before moving to full production. Code: NDX NOV4 10 Spread 31 CALL 6.8% 32 PUT 5.0% As an IC 12.6% Last edited by HowardCohodas; Nov 28, 2010 at 12:11pm. Reason: Clarification & Calculation Error

Nov 28, 2010, 10:26am	#31
DionysusToast Legendary Member Member Since Dec 2009 5,501 Posts	Re: Watch HowardCohodas Trade Index Options Credit Spreads When you say 14.7% - is that 14.7% of your reduced account size or 14.7% of risk for the trade ? On a per-option contract basis, what was your dollar risk, dollar return & dollar fees for this trade ? We don't need to know how many contracts, just nice to have an idea of the risk & reward without getting the calculators out... __________________ I cannot see., however why we should expect to find a "system" which will work in the stock market; surely the possibilities of profits for the student justify the time and effort required to learn market interpretation. Humphrey B Neill - 1931

Nov 28, 2010, 11:50am	#32
Hotch Legendary Member Member Since Jul 2008 1,411 Posts	Re: Watch HowardCohodas Trade Index Options Credit Spreads I would carry on with your own calculations tbh. TOS might of made some epic ** up in their % of touch. __________________ I'm just the guy that never tried, I'm just the stupid ** with brilliant luck and sometimes a bright idea.

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