Watch HowardCohodas Trade Index Options Credit Spreads

[HowardCohodas]

1 - You mentioned probability above. Can I confirm that you are using the option data to give you the probability of price hitting that point and not any additional analysis?

See post on Probability of Touching - FAQ #3

2 - What is the logic behind applying your strategy to 3 highly correlated markets?

FAQ #1

I also have 1 request
1 - Could you add a few columns to the sheet - can you put in the fees - so we can see the total credit to the account after fees ? Could you also add in max risk ? I am guessing this comes from a spreadsheet & so the column should be easy to add. Whilst I don't think you need to be teaching people about spreads on here as per the A'rab - it would be nice if we didn't have to calculate risk & reward ourselves.

The spreadsheet data I provided comes from my Excel Dashboard. I do not have those columns. As much as I love you, I am not inclined to add them. However, the data is a pain to format for the forum, so I will likely write a simple application that spits out the data "forum ready." At that point I could be persuaded to add those columns.

 

[HowardCohodas]

Dashboard Updated - See link in signature.

 

[Martinghoul]

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?

 

[HowardCohodas]

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.

 

[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.

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]

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]

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

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]

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.

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]

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]

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.

NDX   NOV4 10

Spread 
   31         CALL      6.8%
   32         PUT        5.0%

As an IC                12.6%

 

[DionysusToast]

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]

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

 

[HowardCohodas]

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...

Thank you for helping me spot a bug in my profit calculations and for forcing me to be more precise when illustrating the profit of an iron condor.

My bug was in using the closing Mark prices at expiration rather than 0. That's fine for monitoring a trade in progress, but is obviously wrong for calculating results at expiration.

NDX Weeklies -- Difference in Strike = 25

Spread 31
Credit 1.6
Profit = 1.6/(25 - 1.6) = 6.8%

Spread 32
Credit = 1.2
Profit = 1.2/(25 - 1.2) = 5.0%

Profit as Iron Condor
Total Credit = 1.6 + 1.2 = 2.8
IC Profit = 2.8/(25 - 2.8) = 12.6%

It better to do the IC profit calculation as above than simply adding the profits from the spreads and I shall do so in the future. I was just being lazy and showing a lower value than was justified. Not a very good excuse for a math guy.

 

[HowardCohodas]

TOS might of made some epic **** up in their % of touch.

Perhaps they did, however I disclosed my method of calculating it and their's was close enough to mine for me to abandon mine.

See FAQ link in signature.

 

[DionysusToast]

Thanks for clarifying Howard. So - as I understand it, spread 31 works out as follows:

Per contract risk = $2,500 (difference in strike prices & * 100)
Per contract credit = $160 (net credit * 100).

I presume fees are almost irrelevant right - probably $1 per leg.

Is this correct?

 

[HowardCohodas]

Is this correct?

Yep.

 

[DionysusToast]

Yep.

Thanks for replying Howard.

 

[arabianights]

DT is being very polite here. There are two possibilites - either it's because Howard is engaging him civily (which is perfectly possible) - or there is lulz afoot...

 

[Hotch]

Perhaps they did, however I disclosed my method of calculating it and their's was close enough to mine for me to abandon mine.

Ah, fair does then.

 

[meanreversion]

DT is being very polite here. There are two possibilites - either it's because Howard is engaging him civily (which is perfectly possible) - or there is lulz afoot...

He lulz him into a false sense of security.

Actually my lulzometer needle is barely flickering.