Watch HowardCohodas Trade Index Options Credit Spreads

[meanreversion]

You mentioned the one trade that was on the verge of going bad that I managed to a small loss. I thought looking at the overnight futures before the market opened to decide whether to pull the trigger immediately was good practice. Apparently you do not. Could you elaborate further?

It sounds like you were close to pulling the trigger, but then the Asian/European markets rallied which then of course pushed the US futures higher.

What you did was probably the "right" thing, however I was using it as an example of how, when close to stop out levels, you might look for reasons to avoid stopping out. In this instance, no harm done, but loss aversion is a powerful force and needs to be fought if this strategy is to avoid problems.

I would seriously advise cutting back to 2 indices, if not 1. They will all move in an identical fashion anyway, so what you could do is take 3 times the risk in just S&P and you'll end up with similar returns - but with a far easier time operationally.

 

[HowardCohodas]

Depends on his risk per trade baselined against account (which he's not disclosing). I'm guessing that his combined exposure across all spreads baselined against account is probably about 50% because of the faith in being able to close at the 15% PoT threshold.

So I think he would be wiped out on something like the 6th May flash crash because of the correlation of the indices. I don't think he realises primarily through lack of exposure to just how severe it gets when there ain't anybody around to take the other side of your trade.

Let's assume for a moment that I am all in. That should be the worst case. Then half of my spreads would have triggered their circuit breaker for a loss of from 20% to 100%. I'll give you 100% because during these crisis moves, there is no telling what price I would get and what liquidity conditions would prevail.

With these worst case assumptions, the other half of my spreads would have gone to maximum profit. Not a great day, but I hardly think it a wipe out.

Now a huge amplitude whipsaw triggering both halves of the Iron Condor circuit breaker in a very short period of time would wipe me out if I were all in. What's the chance of that happening?

 

[HowardCohodas]

quick push to the line howie, you're nearly legendary

Sorry. I don't understand.

 

[meanreversion]

You're a legendary member now, congrats. It's quite a feat, and should be added to your resume.

 

[scose-no-doubt]

Now a huge amplitude whipsaw triggering both halves of the Iron Condor circuit breaker in a very short period of time would wipe me out if I were all in. What's the chance of that happening?

Once every couple of years I think. Probably more now.

Probably same chance of natural disaster + war breaking out somewhere important + huge political decision somewhere important

 

[HowardCohodas]

It sounds like you were close to pulling the trigger, but then the Asian/European markets rallied which then of course pushed the US futures higher.

What you did was probably the "right" thing, however I was using it as an example of how, when close to stop out levels, you might look for reasons to avoid stopping out. In this instance, no harm done, but loss aversion is a powerful force and needs to be fought if this strategy is to avoid problems.

I would seriously advise cutting back to 2 indices, if not 1. They will all move in an identical fashion anyway, so what you could do is take 3 times the risk in just S&P and you'll end up with similar returns - but with a far easier time operationally.

Cutting back to 2 or 3 indexes.
The RUT is the least correlated with the other two. So I'm thinking that I will cut back to the NDX & RUT. I don't even like the workload in relatively calm times so I'm likely to suffer a sever case of overload in a crisis. No matter my crisis management abilities, in a crisis mistakes will occur and opportunities will be lost.

 

[robster970]

These two are still highly correlated Howard - I think providing you accept that if one goes off on a tangent, the other will too then you know what you're dealing with.

If by trading the different indices you think you are distributing risk, then I think this is a false premise. If you're looking for mutiple trading opportunities and accept correlated risk then that's different.

 

[HowardCohodas]

You're a legendary member now, congrats. It's quite a feat, and should be added to your resume.

I get it now. I saw it under your name and the light bulb finally went on. Thanks.

In another forum, I was criticized for having so many posts in this forum.

 

[robster970]

In another forum, I was criticized for having so many posts in this forum.

Why?

 

[HowardCohodas]

These two are still highly correlated Howard - I think providing you accept that if one goes off on a tangent, the other will too then you know what you're dealing with.

If by trading the different indices you think you are distributing risk, then I think this is a false premise. If you're looking for mutiple trading opportunities and accept correlated risk then that's different.

Distributing risk was never the objective. I only mention the somewhat smaller risk of the RUT relative to the NDX as the reason for not eliminating the RUT from the mix.

I only trade multiple indexes to be an example to my potential students. The RUT is very popular among those who teach similar strategies. Another reason for adding the NDX is that it has weeklies and trading weeklies is generating considerable interest among those who trade credit spreads.

 

[HowardCohodas]

Why?

I doubt that is would surprise you that I tend to polarize those who read my posts. It was just one more "sin" to add to the list to serve as a warning for what participants in that forum were about to endure.

 

[robster970]

Wow - a post count on another board matters. Crazy.

 

[meanreversion]

Found this little snippet, Howie, thought you might be interested -

Nassim Taleb was asked about common mistakes traders make. He responded to Derivatives Strategy with an answer useful for both beginner & expert:
“As a trader, my job is to understand biases and trade on them. There are all kinds of biases. The most common is the small sample bias. Let’s say you have 1 to 1000 odds you will come home every day with a dollar and once in a while you lose $1000. Many traders show very steady incomes but they could be fooling themselves because they don’t have a long enough period of time to chart their performance. Their Sharpe ratio will not be indicative. In option trading, there is a similar bias. Short premium option traders, typically those who sell out-of-the-money options, are more likely to make money on a daily basis and then blow up. Likewise the yield hogs, those traders who would take any risk for a few basis points. You can fool yourself with your Sharpe ratios, and you can fool all of the financial engineers, but you can’t fool an old Chicago trader who went bankrupt twice.”

 

[HowardCohodas]

Found this little snippet, Howie, thought you might be interested -

Nassim Taleb was asked about common mistakes traders make. He responded to Derivatives Strategy with an answer useful for both beginner & expert:
“As a trader, my job is to understand biases and trade on them. There are all kinds of biases. The most common is the small sample bias. Let’s say you have 1 to 1000 odds you will come home every day with a dollar and once in a while you lose $1000. Many traders show very steady incomes but they could be fooling themselves because they don’t have a long enough period of time to chart their performance. Their Sharpe ratio will not be indicative. In option trading, there is a similar bias. Short premium option traders, typically those who sell out-of-the-money options, are more likely to make money on a daily basis and then blow up. Likewise the yield hogs, those traders who would take any risk for a few basis points. You can fool yourself with your Sharpe ratios, and you can fool all of the financial engineers, but you can’t fool an old Chicago trader who went bankrupt twice.”

Good lessons there.

Sounds like I should keep a significant bit of my powder dry.

Oh wait! I do, just not in this account.

I do take the point. The key question is, have I engineered enough enhancement and protection into my strategy to overcome steam roller days. I honestly don't know yet, so it remains a continuous work in progress.

Thanks for the insights.

 

[DionysusToast]

Trouble with this strategy, if you don't risk all, the returns are extremely low. Total returns are key. Now we learn HC has another account. Bet this account isn't factored into his total returns histogram. Told you this was fudged guys. Keeping half your money aside for a blow up also halves your returns.

Not that HC isn't fooling himself here too.

I recommended Taleb to HC a while back. It's Triana that he really needs to read though.

 

[scose-no-doubt]

DT Howard has talked about his "quarantined funds" since the beginning of the thread :S

 

[DionysusToast]

Maybe I'll create 2 futures accounts with $1000 in each. I'll short ES in one & long the other. Reckon I can show a 25% gain in one of them without too much bother. Of course i'll blow the other.

 

[DionysusToast]

DT Howard has talked about his "quarantined funds" since the beginning of the thread :S

Score - let's say HC has 50% of his funds in this account & the rest sitting there as buffer for this strategy. We are now expected to believe he's made 120% of the 50% he's been trading.

As I mentioned before. Only the best looking numbers appear here. It's a fudge.

 

[meanreversion]

DT Howard has talked about his "quarantined funds" since the beginning of the thread :S

I think that refers to the money held by the broker. E.g. if max loss is $10,000, the broker holds $10,000 until such time as the spreads expire.

The existence of the "other" money is new to me, not surprising though. What % of your trading pot do you dedicate to this strategy Howard?

 

[scose-no-doubt]

Score - let's say HC has 50% of his funds in this account & the rest sitting there as buffer for this strategy. We are now expected to believe he's made 120% of the 50% he's been trading.

As I mentioned before. Only the best looking numbers appear here. It's a fudge.

What if he got 10:1 and made 3%+ on weekly spreads for 4weeks plus the monthly spreads?