High Probability - Low Risk Spreads

Which spread do you like best for High Probabily, Low Risk

  • Reverse Calendar Spread

    Votes: 11 29.7%

  • Short Condor

    Votes: 8 21.6%

  • Reverse Iron Condor

    Votes: 7 18.9%

  • Short Butterfly

    Votes: 8 21.6%

  • Reverse Iron Butterfly

    Votes: 3 8.1%
  • Total voters
    37
Quote from MasterAtWork:

Hi Walt,

Before trying to answer your question, take a look at what probabilities you refer. How are they computed, underlying assumptions, in which "univers"...
You then would realize that probabilities mean nothing (see gaps, jumps, crashes...) and the main point is costs and common sens.

You would need the all set of eventuality to work with probability, and there is no such a thing available on markets.
A 1800 S&P oct call got a probability much smaller than a 1500 put to be in the money at expiration date, but it doesn't mean it will.
Lehman or Bear stern collapses were out of probability 2 years ago. Hence, LEAPS deep out of the money puts were no probability, but common sens.

Probabilities don't make money, but costs always eat it.
More...

I agree that probabilities have been foiled. Afterall, that's the essence of Nassim Taleb's Black Swan epistemology. However, that's why I coupled risk management with probabilities. LTCM, Victor Niederhoffer & many other hedge funds that failed reportedly did so (at least in part) due to being overleveraged.

Walt
 
Quote from atticus:

GOOG flies are inside a dollar market on a 30-wide, as an example of a fly market on a $400 stock. I've made more on flies that any other position.
More...

Were your flies Long, Iron, Short or Reverse Iron???

Walt
 
Quote from jones247:

I agree that probabilities have been foiled. Afterall, that's the essence of Nassim Taleb's Black Swan epistemology. However, that's why I coupled risk management with probabilities. LTCM, Victor Niederhoffer & many other hedge funds that failed reportedly did so (at least in part) due to being overleveraged.

Walt
More...

Walt,

Without quoting Taleb, options probabilities are built on "risk-neutral univers", not real one.
Take a look at some examples of option models, you will see that we can' t know real probabilities. So the numbers you got extracted from option prices are basically quite wrong.
But you finally can rely it to Taleb, that " it's always best to do things without information as to do with wrong ones."

"LTCM, Victor Niederhoffer & many other hedge funds that failed reportedly did so (at least in part) due to being overleveraged"

Right. But all of them ( clever people) were overleveraged because probabilities they computed lead them to do so, "rationally". Markets and people are not.
 
Quote from rallymode:

Well you do need some serious vol modeling before those short calendars become high prob plays. Without that it's nothing better than the average coin flip trade on ET. LOL
More...


How do you know what I voted for ? :D
Also , this poll doesn't includes my favor (time flies) options spread
Switches , baby !
 
Is anyone experienced with Reverse Iron Condors where the long legs are ITM and the short legs are ATM? I tried such an entry today. My logic is based upon the fact that if an Iron condor is established atm, then it has a high probability of failure. Conversely, if such a set-up has a srong chance of failing with an IC, then the Reverse IC must have a strong chance of succeeding under such circumstances. As an attempt to enhance my chances even further, instead of establishing the longs ATM, I entered ITM.

Is my logic wrong here???? If so, time will tell, as the options are set to expire in October.

Walt
 
IV_Trader, what are the time flies? The same strike but different months? Do you sell first month -1 second month +2 and third month -1?
 
Wow this thread is more complicated than it needs to be. Amazingly diverse strategies you have listed there, however they all come under the same category and can be simplified.

To anyone who wants to trade, you can summarize generic strategies under three (3) main categories:

1. Outright
- Lowest Brokerage. Highest reward payout, but highest risk (on average)
- Usually requires intense use of price action or charts. Directly influenced by fundamentals such as data in equity or bond markets
- Lowest edge. But the simplest form of trading.
- Volatility is ENTIRELY dependent upon market conditions and timing of trades.

2. Inter-market spreads (two legs)
-Spreading with two legs. Not to be confused with 'intra-market spreads' (this is small-duration calendar legs such as Euribor or Eurodollar 3-month spreads
-Easily the best way to learn trading. Helps you become a better Outrighters.
-Slightly higher cost (double legs, brokerage)
-Risk of legging. Depends on what you spread. Could have low volatility, could have high volatility.
-Must require a combination of charts and price action to execute. Also requires some basic look at currencies/equities for possible leads.
-Able to do through multi-sessions (usually). Fundamental data releases does not necessarily always push these spreads to a predictable way (which is good)

3. Intra-market spreads (3-month spreads, or butterflies (4 legs)
1. The lowest risk of all trading. But has the highest cost. Very high brokerage.
2. Relies on size. Size size size. Nothing more. Involves averaging almost every single tick on the butterfly or the 3-month (low risk) spread
3. Usually only applicable to Bills which are purely interest rate derivatives (doesn't have government risk like the U.S. Tnote or the German Bund).
4. Much less risk/reward colour and variety. Always taking a tick. Always churning brokerage.
5. Very, very slow. Queue positioning is essential.
6. Can hold through multiple sessions and multiple weeks
7. Yes it has the lowest risk profile but you're also learning trading in slow motion



Conclusion
The best market to learn trading off and with the best risk/reward profile for people with less than 3-4 years profit making experience is definitely intermarket spreads. So nothing like a Butterfly or Condor.

The reason is that you can always lower size and scale in/out and have a chance of running something. For example the 10-year German Bund with the U.S. T-note spread, although notoriously hard, has a chance of reversing and paying 5-8 ticks. But a Butterfly would NEVER do such a thing, you're making a tick and trying to re-enter later that day or week

That is, there's more 'fluidity' with the one in the middle. Learn off the 2nd style of trading. Obviously you need to venture into the 3rd one eventually, but the trading is very slow motion so you can learn quicker and more efficiently doing something else.
 
s0mmi, seems like you talk about futures spreads than options.
In short you mean buy ZN and sell Bund? I was doing such things like buying 2 ZN and selling 3 ZF.
 
Instead of maximizing probability, look to maximize payoff, which is:

probability*(reward/risk)

Usually, the high probability winners have a low reward, so seek to maximize a combination of the two characteristics. This maximum typically is found with the ATM or ITM options.
 
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