How good your market neutral credit spread strategy ?

[dmo]

Quote from caroy:

Over the last year I've become a premium seller of ag and soft options. I've only been doing this strategy for 18 months or so.

I aim to make 5% a month and diversify that option selling by shorting off setting puts and calls in highly correlated markets.

I calendar spread to help control the risk and roll the positions forward if fundamentals remain appropriate as the lead month option nears expiration and the delta of that option approaches zero.

I exit when the lead month option reaches at the money. So far i've had only a couple losing trades that were manageable and have not effected my 5% target for each month. I only use a small percentage of my funds and keep a large amount available to cover the margin requirements if something historic happens: ie gold run up and the corn run up of june july.

so far so good. I have a few partners who trade a similar strategy but in my opinion over leverage their accounts and are more suseptible to the blow out.

I realize the risks of premium selling and try to manage them to avoid the blowout scenario. In general my trading is very boring but so far its compounded nicely. By having my strict exit rules i hope to avoid the blow out scenario. But rules are always easier stated than followed.

I'm always a little suspicious when I hear option traders talking about percentage monthly gains, as that smacks of routine premium selling, which is the kiss of death.

On the other hand, if you've survived the ag markets the last 18 months, you must be doing something right - especially if you find your trading "boring."

Still, have you yet lived through a series of lock-limit days? Just as an exercise, go back and look at some 1986 charts when Chernobyl happened. Or if you're trading meats, look at the charts from a few years ago when mad cow disease was reported in the US herd. Ask yourself how you would fare if you got caught in such an event. It will happen again.

 

[dagnyt]

Quote from nell:

But we can arrange to have small losses, right ?

Right. Below is my mantra:

1) It's easy to make money with the iron condor strategy.

2) You make money most of the time.

3) The big problem is holding onto those profits because MOST traders fail to understand that the single most important facet of buying iron condors is RISK MANAGEMENT.

4) Good risk management requires that you take no large losses. Small losses are good for you and you must be willing to take them.

Here's what you can do:

a) NEVER (that means never) allow short options to expire worthless. At some point they must be bought in. You never know when a huge move will occur on expiration Friday - yesterday being a great example. (SPX was up >8.5% on the opening)

b) When the winning side of an iron condor becomes cheap enough - a relative term and you must decide for yourself - buy it in.

You can then either CAREFULLY sell new options against the not-so-good side of the iron condor, close the whole iron condor, or closely monitor the not-so-good side - intending to buy it in when the loss reaches your limit.

Your loss limit must be set low enough so that you don't ever get hurt. No iron condor should ever be allowed to approach the maximum loss value.

If you do as suggested, you will find that sometimes you closed the position, took a loss, and the markets then reversed direction. Do not let that bother you. The money saved when that's the winning decision will far outweigh the times when adjusting is not the winning decision.

Your goals as an iron condor buyer should be - and they must be in this sequence:

1) Do not go broke. Survive to invest another day.

2) Make money

3) Accumulate wealth over time.

If you agree with my philosophy, you can read more at my blog: http://blog.mdwoptions.com/options_for_rookies/

or in: The Rookies Guide to Options (my recent book)

 

[nell]

Quote from sugar:

About options strategies with high probability ratio:

A lot of floor traders, especially the younger ones, love to write naked options. "The fools," they say, speaking of the options buyer, “they just keep giving me their money, and I keep selling 'em options that end up expiring worthless." For 11 months of the year, they, can report a 90 percent success rate writing options, but in the last month, seemingly out of nowhere, the market moves 10 percent and they find themselves shelling out a lot more money than they had made, or even going completely broke.

Victor Sperandeo in Principles of Professional Speculation, 1994

I check the book, it seems Victor is a debit strategy, i mean his type mostly only long call/put targeting big reward with small risk. The way of trade really in the opposite way of the premium seller.

So, I don't think we can count his quote. If we talk about Obama with Republican, we will have the same result if we talk about Mccain with Democratic (no offense dude ! just some illustration)

Or Victor also premium seller too ?

just let me know

thx

 

[nell]

Quote from dmo:

I'm always a little suspicious when I hear option traders talking about percentage monthly gains, as that smacks of routine premium selling, which is the kiss of death.

On the other hand, if you've survived the ag markets the last 18 months, you must be doing something right - especially if you find your trading "boring."

Still, have you yet lived through a series of lock-limit days? Just as an exercise, go back and look at some 1986 charts when Chernobyl happened. Or if you're trading meats, look at the charts from a few years ago when mad cow disease was reported in the US herd. Ask yourself how you would fare if you got caught in such an event. It will happen again.

ANSWER : But we can arrange to have small losses, right ?



Right. Below is my mantra:

1) It's easy to make money with the iron condor strategy.

2) You make money most of the time.

3) The big problem is holding onto those profits because MOST traders fail to understand that the single most important facet of buying iron condors is RISK MANAGEMENT.

4) Good risk management requires that you take no large losses. Small losses are good for you and you must be willing to take them.

My opinion, there's no bad things with the premium seller, also no good things with that. It just type of trader. Many ways to Rome, right ?

 

[newguy05]

nell, ask yourself if this blackswan event from last week happens again. Do you now have a better plan to deal with it, without blowing up your account.

 

[BeatingtheSP500]

Quote from nell:

what edge ?

sorry my ignorance but i don't catch your question

I'm selling very far OTM because i interested with the high probability ratio.

Do you try to back test before ?

You can try RUT, back test from the beginning the stock came up (I think it's begin from 1987)

Check how often RUT ranging exceed 10%, I calculate from the highest to lowest price that month, and it's very rare (if the economy not have any crush). Especially 2003 to 2007, if i start that time - i already make money not only for living, but for others living too

That's why i prefer very far OTM rather than only 1 SD (Standard Deviation), the key is to catch if the market boom right now, we get out of the trade (like 911 and now), if we can avoid it, we can make 6-10% and compound it every time.

Also with this big probability ratio, it easier for us to compound it. For me I rather have little profit but i compound it, than have big profit and cannot compound it.

But right now, I cannot catch it, i still in the game when there's boom.

Any comments ?

You need a idea to act on, and options are only a tool.

I don't care which option strategy you want to discuss - iron condor, spreads, covered calls, selling naked, ratio writes, etc. They all have one thing in common: NEGATIVE EXPECTATION.

Buying yourself a hammer and a chopsaw does not mean you bought a house. You have to have an idea of what you want to do with those tools. Then you have to know how to use those tools or they could kill you. It is no different with options. They are worthless as themselves. Only when you use them to facilitate your 'edge' will they prove to be useful.
Your edge can be anything. Better analysis of common macro economics, quicker access to information, mean-reversion vs. trend-following, etc. A 90% win rate with 7 or 8% average win is a losing proposition. You don't need a 90% win rate. An iron condor month after month will eventually lose money. However, if you are a little better than average in deciding when to put on the IC, or even each leg, or when to exit, etc, then your 'above-averageness' will create a positive expectation. But it would be your timing acumen creating alpha not the textbook strategy.

 

[dagnyt]

Many ways to Rome, right ?

Yes. But if you fall into the moat and are eaten by an alligator, you will not get to Rome.

Intelligent RISK management gets you to your destination.

Lack of risk management turns the trip into an unknowable, risky adventure.

Your choice.

Mark

 

[caroy]

Quote from dmo:

I'm always a little suspicious when I hear option traders talking about percentage monthly gains, as that smacks of routine premium selling, which is the kiss of death.

On the other hand, if you've survived the ag markets the last 18 months, you must be doing something right - especially if you find your trading "boring."

Still, have you yet lived through a series of lock-limit days? Just as an exercise, go back and look at some 1986 charts when Chernobyl happened. Or if you're trading meats, look at the charts from a few years ago when mad cow disease was reported in the US herd. Ask yourself how you would fare if you got caught in such an event. It will happen again.

I imagine most of my success has come from avoiding these events. I think the calendar spreading helps to some degree but there is always added risks of delta decrease in the front month and very bad timing for an unprecedented event.

The only other alternative I see to protect on this is selling deep OTM bear call spreads so the risk is known and limited.

 

[sugar]

Quote from BeatingtheSP500:

Buying yourself a hammer and a chopsaw does not mean you bought a house. You have to have an idea of what you want to do with those tools. Then you have to know how to use those tools or they could kill you. It is no different with options. They are worthless as themselves. Only when you use them to facilitate your 'edge' will they prove to be useful.
Your edge can be anything. Better analysis of common macro economics, quicker access to information, mean-reversion vs. trend-following, etc. A 90% win rate with 7 or 8% average win is a losing proposition. You don't need a 90% win rate. An iron condor month after month will eventually lose money. However, if you are a little better than average in deciding when to put on the IC, or even each leg, or when to exit, etc, then your 'above-averageness' will create a positive expectation. But it would be your timing acumen creating alpha not the textbook strategy.

Nell, pay attention to BeatingtheSP500 because this is the bottom line here. Trade with an edge, manage your risk and be consistent to achieve the positive expectation of your trading.

 

[dagnyt]

Quote from caroy:

The only other alternative I see to protect on this is selling deep OTM bear call spreads so the risk is known and limited.

I describe another alternative in my book, The rookies Guide to Options.

Buy insurance. When trading iron condors, or credit spreads in general, cash is collected. I always invest some of that cash by buying straddles. Owning some extra calls and puts can make a big difference - every once in a while. It's well worth the cost.

If you are buying calendar spreads, you are already paying cash for the position. I don't know how you would judge how much to invest into being naked long a few straddles.

Of course the time to own those straddles is when IV is much, much lower than it is now.

Mark
http://blog.mdwoptions.com/options_for_rookies/