Watch HowardCohodas Trade Index Options Credit Spreads

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Old Nov 26, 2010, 9:49pm   #22
 
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Re: Watch HowardCohodas Trade Index Options Credit Spreads

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Old Nov 26, 2010, 10:34pm   #23
 
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Re: Watch HowardCohodas Trade Index Options Credit Spreads

My question to you, Howard, is whether you have estimated how much you pay in commissions/bid-offer when doing these multi legged option strategies?
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Old Nov 26, 2010, 10:55pm   #24
 
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Re: Watch HowardCohodas Trade Index Options Credit Spreads

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Originally Posted by Martinghoul View Post
My question to you, Howard, is whether you have estimated how much you pay in commissions/bid-offer when doing these multi legged option strategies?
I trade spreads as an entity with a specified limit on the credit I require. Bid/Ask is only an issue with respect to time to fill. If I don't get my price, I pass. The exception is when abandoning a spread which is done at market.

Commissions is a cost of doing business. It averages around 6.5% of the credit I receive. I could do better if I stuck to indexes with higher differences in strike prices. However, I trade several indexes for reasons discussed in the FAQ. Link in signature.
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Old Nov 27, 2010, 1:54pm   #25
 
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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.
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Old Nov 27, 2010, 2:17pm   #26
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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).
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Old Nov 27, 2010, 2:22pm   #27
 
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Re: Watch HowardCohodas Trade Index Options Credit Spreads

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

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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.
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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.

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Old Nov 27, 2010, 3:30pm   #28
 
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Re: Watch HowardCohodas Trade Index Options Credit Spreads

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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.

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