Watch HowardCohodas Trade Index Options Credit Spreads

[HowardCohodas]

Three spreads expired on Thursday and the margin funds were released midday today.

38  L  11/24/10  12/02/10  DEC1 10   NDX  CALL  2225  2250  1.110  18.C  Expired
39  L  11/24/10  12/02/10  DEC1 10   NDX  PUT   2050  2075  1.100  18.P  Expired
40  L  11/26/10  12/02/10  DEC1 10   SPX  PUT   1125  1150  1.500  19.P  Expired

One spread, part of an Iron Condor developed a roll opportunity

21  L  10/27/10            DEC 10    RUT  CALL   800   810  0.500   8.C
16  L  10/18/10  11/23/10  DEC 10    RUT  PUT    590   600  0.950   8.P  Closed - Rolled to reform IC
37  L  11/23/10  12/03/10  DEC 10    RUT  PUT    650   660  0.920   8.P  Closed - Rolled to reform IC
42  L  12/03/10            DEC 10    RUT  PUT    700   710  0.750   8.P  Entered to reform IC

Four weeklies were opened to form two Iron Condors

44  L  12/03/10            DEC2 10   NDX  CALL  2250  2275  0.750  20.C  Open
43  L  12/03/10            DEC2 10   NDX  PUT   2100  2125  1.800  20.P  Open
45  L  12/03/10            DEC2 10   SPX  CALL  1250  1260  0.500  21.C  Open
46  L  12/03/10            DEC2 10   SPX  PUT   1150  1175  0.650  21.P  Open

One of the weekly spreads was constructed improperly. Repair to be attempted on Monday
See spread 45 above.

Yield summary for expired series. All were weeklies.
38 4.6%
39 4.6%
38 & 39 combined as an iron condor 9.7%

40 6.4%

Dashboard (link in signature) is updated to reflected all changes.

 

[HowardCohodas]

Over time, my guess is this will blow up Howards account, although I hope this does not happen.

After reading my response, can you think of anything I can do better to minimize the possibility of disaster? You always make me think hard about the issues you bring up, and I try to undergo continuous improvement.

You are now a partner in my success (or failure), without pecuniary risk or reward. :cheesy:

 

[HowardCohodas]

It would appear that my interest in options dates back even further than I initially recalled. While moving into my new office... Well actually, while moving from the small bedroom into the one my son had while is lived at home, I've been reconfiguring the contents and location of my library.

I just came across a small book titled "Planned Profit Through Hedging, a quick course in investment strategy" by Robert W. Brickel self published in 1974. Options are prominent throughout the work, however he never mentioned or showed an Iron Condor. It was still fun to skim through it.

 

[arabianights]

You won't ever blow up if you reduce size religiously in proportion to your account, given that you have a quantifiable downside.

However, you may have a system that almost surely will make your account approach an asymptote at 0...

 

[DionysusToast]

I have only seen the risk/reward to 1 leg of a set of trades. In this case it was a risk of $2500 to gain $160. I can't comment on the risk:reward of the total position you take (to me one position would be a set of trades) as I haven't seen it and am too lazy to calculate it.

Now as your gain is only $160, you don't have much money to hedge the position and keep your profits. The cost of hedging would likely be more than the $160. Mind you - I guess you'd only use it when it looked like you were going to get stung.

You could take opposing positions or trade multiple markets whose volatility is not correlated (could be easier said than done finding them nowadays). The problem is that if your opposing position is also risking $2500 to gain $160, then you really just gave yourself more risk. So - adding opposing positions gives you more risk, not less.

As AN says - you could reduce stake. Reducing stake size is OK but you have to consider the 'granularity' of the market you are trading. You can trade stocks in increments of 1 share. ES Futures is 1 contract but with a notional value of $50k - the latter being less 'granular' and therefore harder to scale down in lean times. How scalable is your method?

Most stock traders think that risk = number of shares * (entry price - stop price). This is not true, maximum risk really = entry price * number of shares. At any point in time, a stock can be suspended and be worth zero before you have a chance to exit. It is extremely unlikely but it is possible. This is why it's relatively safer to day trade because of time in the market but more dangerous because of increased position sizes. The point being is that time is a risk, the more time, the more chance of an off white swan crushing you.Whilst you are selling time for $160, it is all that time that puts your $2,500 at risk.

I'm at a loss given the current information on what you could do, perhaps you are testing me and you have the answers already. In which case - sign me up... :smart:

 

[sj8070]

you would do well to learn from Taleb.

I imagine your system is similar to betting on every number on a roulette wheel but 2, eking out small return every time but losing heavily every 18.5 spins...

 

[MrGecko]

I have only seen the risk/reward to 1 leg of a set of trades. In this case it was a risk of $2500 to gain $160. I can't comment on the risk:reward of the total position you take (to me one position would be a set of trades) as I haven't seen it and am too lazy to calculate it.

$2500 is Howards worst possible loss; one assumes that Howard has his own criteria for determining whether a trade has gone against him enough to close it out before the maximum loss is realized- the VIX increasing my some measure, perhaps?

 

[HowardCohodas]

I'm at a loss given the current information on what you could do, perhaps you are testing me and you have the answers already. In which case - sign me up... :smart:

I need to think about most of what you wrote in some detail.

However, I do not have all the answers. I'm continuously worried that I've missed something. And I do value your insights.

Learn from the mistakes of others. You won't live long enough to make all of them yourself.

Everyone already knows the definition of a 'good' landing is one from which you can walk away. But very few know the definition of a 'great landing.' It's one after which you can use the airplane another time.

Always remember you fly an airplane with your head, not your hands. Never let an airplane take you somewhere your brain didn't get to five minutes earlier.

Remember, you're always a student in an airplane.

Keep looking around; there's always something you've missed.

You cannot propel yourself forward by patting yourself on the back.

An airplane will probably fly a little bit over gross, but it won't fly without fuel.

 

[HowardCohodas]

$2500 is Howards worst possible loss; one assumes that Howard has his own criteria for determining whether a trade has gone against him enough to close it out before the maximum loss is realized- the VIX increasing my some measure, perhaps?

I'm not that sophisticated in my approach. If the underlying is within 1% of the short option strike, I abandon the spread ATM. If my loss hits 20% of the funds at risk, I abandon the spread ATM. Since I am using the Mark price for evaluating potential loss, abandoning the spread ATM will likely incur more than just the 20%. I arbitrarily set it at 30% for account risk estimate purposes to be conservative.

 

[HowardCohodas]

you would do well to learn from Taleb.

I imagine your system is similar to betting on every number on a roulette wheel but 2, eking out small return every time but losing heavily every 18.5 spins...

I don't quite get your analogy. The mathematical expectation of my strategy is positive. I don't think you can claim the same for your roulette strategy.

A strategy with a positive expectation does not guarantee success. The Gambler's Ruin Theorem illustrates that nicely.

 

[HowardCohodas]

You won't ever blow up if you reduce size religiously in proportion to your account, given that you have a quantifiable downside.

However, you may have a system that almost surely will make your account approach an asymptote at 0...

The Gambler's Ruin Theorem nicely illustrates that even a strategy with a positive expectation is not immune from... well, ruin.

"Asymptotically approaching 0" and "for all practical purposes" are two of my favorite concepts in physics.

 

[sj8070]

"The mathematical expectation of my strategy is positive."

Prove this...

 

[HowardCohodas]

"The mathematical expectation of my strategy is positive."

Prove this...

First, why would someone who studied mathematics at Case Institute of Technology (before they merged with Western Reserve University) build a strategy that did not have a positive expectation? And what trader would risk serious money with a strategy that did not have a positive expectation? Do you?

And second, I believe I have shown my calculations in this forum. Have you looked? If you look and can't find it, I'll repeat it. Let the search function be your friend. And prove you did it.

 

[arabianights]

The Gambler's Ruin Theorem nicely illustrates that even a strategy with a positive expectation is not immune from... well, ruin.

It is, actually, subject to correct money management.

Of course as the learned DT says this assumes infinite granularity, but that isn't as much of a problem as you may think.

P.S. It is not a theorem. You may find this overly pedantic but it's pretty important.

 

[sj8070]

My point was rhetorical. It is impossible to prove any trading strategy has a positive expectation as the set of possibilities is unbounded and uncertain.

With rolling a dice there is risk but no uncertainty.
In a trading system there is risk and uncertainty.

 

[HowardCohodas]

It is, actually, subject to correct money management.

Of course as the learned DT says this assumes infinite granularity, but that isn't as much of a problem as you may think.

P.S. It is not a theorem. You may find this overly pedantic but it's pretty important.

Isn't the application of Gambler's ruin money management? I am implying money management by referencing Gambler's ruin.

Pedant away. Back at you.

 

[HowardCohodas]

My point was rhetorical. It is impossible to prove any trading strategy has a positive expectation as the set of possibilities is unbounded and uncertain.

With rolling a dice there is risk but no uncertainty.
In a trading system there is risk and uncertainty.

First, are you claiming your analogy of the roulette strategy has a positive expectation?

Second, if a strategy has a fixed risk and a fixed return and a historically validated probability of success/failure, how do you claim it is unbounded and without the ability of making a valid estimate of mathematical expectation?

A lot of profit is made by companies over long periods of time with historically validated data in the face of uncertainty. The insurance industry comes to mind as one.

 

[sj8070]

no no, it is obvious that any roulette strategy has a negative expectation.

I may need to read more of your method (although I have read this whole thread) but an iron condor does not have a fixed risk...?

 

[HowardCohodas]

I may need to read more of your method (although I have read this whole thread) but an iron condor does not have a fixed risk...?

Show me where I miscalculated. An Iron Condor is made up of a CALL spread and a PUT spread with the same number of options on either side of the current underlying price. Each spread is constructed with each leg having the same number of options such that it has fixed risk and fixed reward. How can the combinations of two spreads each with fixed risk and fixed rewards end up with a not having fixed risk?

 

[arabianights]

Isn't the application of Gambler's ruin money management? I am implying money management by referencing Gambler's ruin.

Pedant away. Back at you.

I don't care what wiki says, it isn't

Not sure what you mean by "applying" gambler's ruin.