Watch HowardCohodas Trade Index Options Credit Spreads

[HowardCohodas]

You're selling options, right?

You are half right. I am selling spreads for a credit. The short option will be closer to the current underlying price. The long option one strike further out. As the closer (short) option is worth more, the net is a credit.

 

[scose-no-doubt]

Did you come up with the 10% figure from your back testing?

 

[HowardCohodas]

Did you come up with the 10% figure from your back testing?

I did a sensitivity analysis on the 10% target and the results are relatively flat around it. It's just the more you want, the fewer opportunities are available. I shoot for 10% because I like to set my goals a little higher than I might expect to achieve. 8% was my net (after any failures) target.

So far, in the almost 19 weeks I have been at this and 32 closed spreads and 20 spreads still open, I have had no significant failures. That's probably not a statistically significant sample size. On just an account equity basis (I'm never all in) I'm up about 12% per month.

I take the warnings of those who tell me that this pace cannot last and I'm in for an eventual collapse very seriously so I'm always looking over my shoulder. I don't know if or when my methods might break down, so I continue to be open with what I do to get the most competent critiques available on this forum.

 

[DionysusToast]

It is hard to phrase this without is sounding like an outright attack. It isn't.

One of the issues here is that Howard has almost painted himself into a corner in terms of needing to believe he is right (putting aside whether he is or not). The following things will all be lost to Howard if this goes wrong.

1) his profits
2) the profits of the people he has taught so far
3) the revenues from the training business he is setting up
4) the sales of the trading book he is writing
5) this log

All of this will effectively be gone. It is a lot of pressure to be under. For sure, I would not want such pressure for trading alone is pressure enough.

Can you imagine the hope of building up your trading account with lots of juicy royalties and training fees and then have that taken away ? Without a fight ?

With all of these things riding on the system being profitable, how easy would it be to convince a man it is not? Especially with a system where trades are infrequent and probability favours a lot of small winners and a few big losers.

 

[HowardCohodas]

It is hard to phrase this without is sounding like an outright attack. It isn't.

One of the issues here is that Howard has almost painted himself into a corner in terms of needing to believe he is right (putting aside whether he is or not). The following things will all be lost to Howard if this goes wrong.

With all of these things riding on the system being profitable, how easy would it be to convince a man it is not? Especially with a system where trades are infrequent and probability favours a lot of small winners and a few big losers.

Nicely done. I've been waiting for this for a long time. I can't decide which one best makes your point, so I'll use both.

​

 

[HowardCohodas]

010 DEC 2010 Trading Summary

Iron Condor 8
Closed Spread 42 with intent to roll. By the time it was filled, an appropriate roll candidate did not exist.

21  10/27/10            DEC 10  RUT CALL   800   810  0.500   33%  (45%)  (2.4%)  8.C
16  10/18/10  11/23/10  DEC 10  RUT PUT    590   600  0.950    1%   86%    9.1%   8.P   Closed @ 86% - Rolled to reform IC
37  11/23/10  12/03/10  DEC 10  RUT PUT    650   660  0.920    0%   85%    8.6%   8.P   Closed @ 85% gain - Rolled to reform IC
42  12/03/10  12/10/10  DEC 10  RUT PUT    700   710  0.750    0%   87%    7.0%   8.P   Closed with intent to roll

Iron Condor 15
Closed Spread 52, which was placed as an unforced error yesterday, because of a Probability of Touching too high for my risk tolerance level. I added to Spread 48 to have a balanced Iron Condor.

35  11/22/10            JAN 11  NDX CALL  2375  2400  1.000   27%  (85%)  (3.5%)  15.C
33  11/19/10            JAN 11  NDX PUT   1875  1900  2.160    2%   70%    6.6%   15.P
48  12/07/10            JAN 11  NDX PUT   2000  2025  2.100   17%   17%    1.5%   15.p
52  12/09/10  12/10/10  JAN 11  NDX PUT   2075  2100  4.110   45%    5%    1.0%   15.P  Closed because of excessive risk

Iron Condor 17
Opened spread 53 to complete Iron Condor

53  11/22/10            JAN 11  SPX CALL  1330  1340  0.350   24%  (21%)  (0.8%)  17.P  Opened to complete IC
36  12/10/10            JAN 11  SPX PUT   1070  1075  0.450    2%  117%   11.5%   17.P

 

[HowardCohodas]

One of the issues here is that Howard has almost painted himself into a corner in terms of needing to believe he is right (putting aside whether he is or not).

Sounds like a game of No-limit Texas Hold'em poker where I am "all in."

 

[meanreversion]

I'm temporarily avoiding answering this question for reasons which I hope will become understandable shortly.

Meanwhile, riddle me this... Of the 52 spreads I have established since I opened the account I report on, 20 remain open. And their net gamma is -6. How does that fit into your model of what I am doing wrong?

How does your gamma change when the underlying market moves? How does your gamma change when vols change? If you're managing an options portfolio, you need to know these things.

I would imagine that you're always short gamma.

Thus, your view is therefore that options are systematically overpriced. However, you have said that you do not believe this to be the case. You are at odds with your own strategy.

At this stage, you will now become susceptible to the "sunk cost" bias. You've invested a lot of time and energy into your current strategy, and indeed this thread. You may now be having doubts about it, but because of the invested time, you will plough ahead anyway. (It's a version of running a losing trade)

You'll do what you want to, but please believe me when I tell you that options are not simple products. The gamma/volatility question I asked you is a fairly basic one, yet you don't know the answer. Had you heard of put call parity before? Do you know what implied vol means? What happens to the vega of a low delta option when volatility increases? And so on. You will eventually learn the answer to all these questions when you start to lose money, at which point you'll wish you thought about it before.

Best of luck to you - by definition, luck is what you will need with this strategy.

 

[HowardCohodas]

Best of luck to you - by definition, luck is what you will need with this strategy.

I'm wondering how long a track record is required for either of us to admit we were wrong? If my account crashes, as many of the sages challenging me here have predicted, it will be incontrovertibly clear. But you guys have formulated your cautions such that you never have to make a declaration.

I can only prove myself wrong by failure. There is no objective criteria that can prove you wrong, or at least prove you really don't understand what is going on.

Sounds pretty asymmetric to me.

 

[meanreversion]

I'm wondering how long a track record is required for either of us to admit we were wrong?

I can only prove myself wrong by failure. There is no objective criteria that can prove you wrong, or at least prove you really don't understand what is going on.

At this point, we're going around in circles a little. Try to think of how you might sell yourself to another investor.. how you would explain your strategy and your edge, i.e. why are YOU able to make money when so many others don't?

You are not a directional trader (you are "agnostic" about where the market goes), so then what? You say that you believe options are fairly valued, and that you don't have a special tool for calculating probabilities, so there's nothing to go on there. The best you've come up with so far is that you feel you are skilled in rolling your strikes around, but as you've been trading this strategy for six months or so, I really can't see you have much of an advantage on this front.

I would urge you to think about this - if options are fairly valued, and your "edge" is in managing the position, you're just as likely to make money from trading the spreads the other way round - can you see this? The fact that you won't do this is because you DO actually believe that gamma is consistently overpriced.. but I can assure you it isn't.

If you don't know your edge, you probably don't have one. You've been unable to articulate why you BELIEVE this strategy will make money in the long run.

Ultimately your edge may be in persuading others to either invest in you, or pay you for tuition. This is a very useful edge to have, don't underestimate it.

 

[scose-no-doubt]

Scose's thoughts on the matter as a non options man.
1)Howard's returns are substantially higher than the market based risk-free rate(s) therefore it is impossible to deny that he is underwriting "substantial" risk for his return. This risk must be the market rate paid (through non-arb pricing principles) for accepting gamma risk amongst other thing through IC strategies. Howard is looking at this one dimensionally and simply believing it is theta but as stated earlier, a glance at even the money markets as a benchmark to show returns for a 60 day period should show how ridiculous that belief is.
2) Considering the fact that qe2 was expected months ago, was calmly priced-in to equities very early on, was in amounts that matched consensus, and therefore had a muted reaction... probably resulting in an end of year melt up (we'll see ) all of this has been very kind to Howard's strategy.
3) Howard is short vega/(gamma?) with a quasi-stop- loss based on his TOS distribution thing which is mechanically measuring sentiment by way of deviation.
4)Howard's system is essentially 10% return for going long this TOS, long QE, short volatility and short economic shocks-during a recession.
5)Howard has no way of even estimating his potential losses should an acceptable level of gamma exposure be breached.

Am I in the right ball park here?

Also a question to those in the know... Would Howard benefit from reduced risks by setting up ICs in markets that are negatively correlated to SP and Nasdax?

 

[meanreversion]

If he were to start trading iron condors in other markets, it would render the entire portfolio unwieldy and prone to basis risk, further compounded by illiquidity during times of market stress.

Scose, your summary seems about right, but I wasn't aware that 5) was necessarily the case - Howard, didn't you provide estimates for your maximum losses as % of equity earlier in the thread?

 

[HowardCohodas]

Once again, into the breach.

I am enthusiastic about learning things I don't know. First because, learning stuff is my thing. And second, it might make me more successful at what I am doing here.

However, how am I to take any wisdom from your concerns when you say "because I am short gamma the result has to be..." when the fact is, as I stated earlier, I am nearly neutral gamma.

If your premise is wrong, what lesson can I take from your conclusion?

 

[scose-no-doubt]

Morning Howard. Did you purposely construct the portfolio to be gamma neutral? Isn't gamma exposure dynamic?

 

[HowardCohodas]

Howard, didn't you provide estimates for your maximum losses as % of equity earlier in the thread?

Risk Analysis

I have touched on it in the past, but here is the full story.

I bail when the loss on capital at risk hits 20%. Since bailing, for me, is buying back the spread at market, I set my estimated potential loss at 30%.

Since 45 days to expiration is generally thought of as a good point to start capturing time decay, my spreads are entered more than one month before expiration. Weeklies are, of course, the exception. In fact, I generally enter a new spread as soon as the quarantined funds become available. This is usually 59 days before expiration.

Since I am in multiple correlated indexes for instructional purposes, let's assume that everything for that month went against me. That means that half my at-risk capital may suffer a 30% loss. Even though I am never "all in," lets set this to 15% total account exposure.

But wait. For the Iron Condors, the market can't be against me on both sides at once. So only half of my trades for that month will suffer a 30% loss in a two month cycle. Now we are down to a 7.5% total account exposure.

But wait. If one side of an Iron Condor goes against me, then I will have rolled 2-4 times on the other side for credits equal to the credit on the initial spread. Let's be conservative and use 2 for our thought experiment. If I have rolled twice, that is three spreads for an average of 5% each. So the losing side suffers a 30% loss and the winning side has a 15% gain.

Back to the top. Bad month nets 15% loss on half the account of a two month cycle.

A bad day at black rock would expose me to approximately a 4% account loss.

I did this pretty quickly, so help me find any errors in this reasoning. Thanks.

 

[HowardCohodas]

Morning Howard. Did you purposely construct the portfolio to be gamma neutral? Isn't gamma exposure dynamic?

Good morning.

No I didn't purposely construct the portfolio to be that way.

Now that gamma exposure has become the crux of the concerns for my methods, I will monitor and report it for a while. It will also improve my visceral vs. intellectual understanding of the greeks.

 

[scose-no-doubt]

are you trading on margin?

 

[HowardCohodas]

are you trading on margin?

Not in a "borrowed money" sense. Finds quarantined when establishing a spread are classified as margin.

 

[scose-no-doubt]

hypothetically, if you went massively offside and had to wait for expiry to cut your losses could your broker cut your trades? Would you have to stump up more margin or anything?

 

[HowardCohodas]

hypothetically, if you went massively offside and had to wait for expiry to cut your losses could your broker cut your trades? Would you have to stump up more margin or anything?

The funds quarantined fully cover the maximum loss possible with the given spread.

I don't know of any reason, except market shutdown that would prevent me from exiting on my schedule. The use of contingency orders (market) should prevent disaster were anything happen to me and my wife simultaneously.