Howard
Okay I´ll ask. What does the yellow color mean again?
How do you get a negative return and not be in danger?
Okay I´ll ask. What does the yellow color mean again?
How do you get a negative return and not be in danger?
HowardCohodas Index Options Credit Spread Trading Journal
- Thread starter HowardCohodas
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Looks like a dead day in the market again.
Was studying the ROSS HOOK last couple of nights and wondered if it was similar to the Auxillou Hook, or Cambridge Hook of ancient times. Ross has been around 30 to 40 years that I remember. I can´t figure why a guy who is a long term trader and presumably with yachts and second homes on Caribbean islands and such is selling a book on his trade method for a $175?
Anyway the Ross Hook is not the other kind of hook that I know, like the old Cambridge Hook. That I found interesting! It is a reversal, albeit one day only, during a new trend that is started, after the higher high and lower low, nowadays the new jargon is calling the ABC or the 1,2,3 set up at the end of a trend. Found that interesting. Didn´t know the Ross Hook, though had heard of it maybe 30 years ago. It is just a confirmation entry. Though nowadays you get computer indicators that tell you the same thing. Nice to confirm it from a bar chart graph though. Going to look for it and see if I can catch one, on any time frame. I even read a couple of videos explaining it. What a world this internet is now!
Was studying the ROSS HOOK last couple of nights and wondered if it was similar to the Auxillou Hook, or Cambridge Hook of ancient times. Ross has been around 30 to 40 years that I remember. I can´t figure why a guy who is a long term trader and presumably with yachts and second homes on Caribbean islands and such is selling a book on his trade method for a $175?
Anyway the Ross Hook is not the other kind of hook that I know, like the old Cambridge Hook. That I found interesting! It is a reversal, albeit one day only, during a new trend that is started, after the higher high and lower low, nowadays the new jargon is calling the ABC or the 1,2,3 set up at the end of a trend. Found that interesting. Didn´t know the Ross Hook, though had heard of it maybe 30 years ago. It is just a confirmation entry. Though nowadays you get computer indicators that tell you the same thing. Nice to confirm it from a bar chart graph though. Going to look for it and see if I can catch one, on any time frame. I even read a couple of videos explaining it. What a world this internet is now!
Yellow = Pay attention
Whether as an opportunity or in jeopardy.
It's looking good for beginning my series on my trading methods this weekend.
Here is a preview. I do not use a fixed percentage distance from the underlying trading instrument price for my short strike. Rather, I use a metric that estimates the probability that the price will reach the short strike. That metric is based on days to expiration and volatility and some other of the usual suspects commonly used in estimating an option's value.
I hope your patience will be rewarded.
What options do I trade?
I trade index options rather than stock options in order to minimize market gap risk. I prefer not to invest the necessary time required to monitor the cause of gaps that can be predicted such as earnings reports. I am most uncomfortable with gap risks I cannot predict such as Steve Jobs announcement this weekend that he will be taking his third medical leave of absence.
I trade options on the NDX and the RUT. Since my commission charges are by the option, the distance between the strike prices that make up the spread relative to the commission costs is important. I trade the NDX with $25 difference in strikes and RUT with $10 difference in strikes.
How do I choose the short strike?
I use two criteria for choosing the short strike of the spread I want to enter. They are the credit I will receive and the chances that I will have to close the spread rather than letting it expire.
I trade spreads as a unit and do not leg-in. I use a limit order so that I get the credit I desire or better when the order is executed.
I seek a total credit of 10% when you include the companion spread and create an Iron Condor. Depending on market bias, the spread on one side may yield 8%, 9% or even 10% by itself. The minimum credit I will accept is 3%. Thus when high returns are available on one side, the other side, at the same risk level, my not offer sufficient return. It may take hours, days or weeks before the companion spreads offers sufficient returns to open a spread.
The key to my strategy is the method I use to estimate the chances that I will have to close the spread before expiration. I know that if the underlying price gets near to or is at the short strike I will close the spread. So I want a metric that will estimate the probability of the underlying "touching" the short price.
At another time I will cover my efforts to solve this problem on my own. Ultimately I found that ThinkOrSwim (ToS) had a metric that was very close to my calculations called Probability of Touching (PoT). To the best of my knowledge, ToS is the only platform that offers that metric.
Choosing the value of this metric is largely related to the trader's risk tolerance. I recommend that new traders start near 10% and work their way up until they become uncomfortable. Then back down a notch. I currently seek short strikes with a PoT level between 15% and 20%. Besides my own stomach acid level, I have some studies that indicate this is a reasonable choice.
Warning:
////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
Although the process I describe is deceptively simple, there is a lot of study and testing that went into developing the strategy. Although I have only taught this to a few friends and family, It took a 20 hour class to cover the details of the risks and management of these trades. These details cannot effectively be communicated by just watching me trade.
////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
I trade index options rather than stock options in order to minimize market gap risk. I prefer not to invest the necessary time required to monitor the cause of gaps that can be predicted such as earnings reports. I am most uncomfortable with gap risks I cannot predict such as Steve Jobs announcement this weekend that he will be taking his third medical leave of absence.
I trade options on the NDX and the RUT. Since my commission charges are by the option, the distance between the strike prices that make up the spread relative to the commission costs is important. I trade the NDX with $25 difference in strikes and RUT with $10 difference in strikes.
How do I choose the short strike?
I use two criteria for choosing the short strike of the spread I want to enter. They are the credit I will receive and the chances that I will have to close the spread rather than letting it expire.
I trade spreads as a unit and do not leg-in. I use a limit order so that I get the credit I desire or better when the order is executed.
I seek a total credit of 10% when you include the companion spread and create an Iron Condor. Depending on market bias, the spread on one side may yield 8%, 9% or even 10% by itself. The minimum credit I will accept is 3%. Thus when high returns are available on one side, the other side, at the same risk level, my not offer sufficient return. It may take hours, days or weeks before the companion spreads offers sufficient returns to open a spread.
The key to my strategy is the method I use to estimate the chances that I will have to close the spread before expiration. I know that if the underlying price gets near to or is at the short strike I will close the spread. So I want a metric that will estimate the probability of the underlying "touching" the short price.
At another time I will cover my efforts to solve this problem on my own. Ultimately I found that ThinkOrSwim (ToS) had a metric that was very close to my calculations called Probability of Touching (PoT). To the best of my knowledge, ToS is the only platform that offers that metric.
Choosing the value of this metric is largely related to the trader's risk tolerance. I recommend that new traders start near 10% and work their way up until they become uncomfortable. Then back down a notch. I currently seek short strikes with a PoT level between 15% and 20%. Besides my own stomach acid level, I have some studies that indicate this is a reasonable choice.
Warning:
////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
Although the process I describe is deceptively simple, there is a lot of study and testing that went into developing the strategy. Although I have only taught this to a few friends and family, It took a 20 hour class to cover the details of the risks and management of these trades. These details cannot effectively be communicated by just watching me trade.
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18 JAN 2010 Trading Plan
Opportunity - Takeoffs are optional
Column: IC
Spread #61 is unpaired. Opportunity to form an Iron Condor.
Column: Spread P/L
Spreads #50, #77, and #69 at more than 80% of capped profit.
Within 5 days of expiration, no opportunity to roll.
Future version of Dashboard will not highlight this column when there are 5 or less days to expiration.
Spreads #69, #58, and #61 at more than 80% of capped profit. Opportunity to roll.
Jeopardy - Landings are mandatory
Column: Probability of Touching
Spread #35 shows at 27% PoT. The overnight futures show a large decline in the index. None the less, this spread should be watched carefully.
Future version will highlight PoT over 10% in last 5 days of trading.
Column: Days Until Expiration
Six spreads are 2 days from expiration.
Column: At Risk P/L
No caution indications.
New Opportunity
None
Morning Howard ( Tuesday morning )
Over the weekend I was looking at the P&F chart and counted four times in 2010 that we had a 60 point move in the OEX. Which is basically a 20% deviation. I would think credit spreads in an Iron Condor would have got hit. In turn this made me curious how your rollover system handled that. If I recall right, you said you had paper traded about 5 months and gone into cash money for past three months. I would think therefore one of those big moves would have caught you?
Over the weekend I was looking at the P&F chart and counted four times in 2010 that we had a 60 point move in the OEX. Which is basically a 20% deviation. I would think credit spreads in an Iron Condor would have got hit. In turn this made me curious how your rollover system handled that. If I recall right, you said you had paper traded about 5 months and gone into cash money for past three months. I would think therefore one of those big moves would have caught you?
Good Morning,
Great question, as usual.
I've been trading this strategy in a separate account for 5.5 months. And I have seen one side of my Iron Condor come close to being overrun on the short strike. I say "close" because when my loss exceeded 20% of my capital at risk, I bailed out. At the same time the spreads on the other side approached their capped maximum, so I rolled it. I've had 4 spreads end in loss. One where the Iron Condor showed a loss.
In three other occurrences I did not let the spread expire because of market gap risk. For the curious, each time the spread expired worthless. The spreads that were closed showed a loss, but the Iron Condor was profitable because of rolling. And the IC yielded more than it was programmed to yield if the market had been sideways, in spite of the loss in one of the spreads. Neat huh?
Other risk issues will be discussed in an upcoming post on risk analysis. Don't let that discourage you from asking questions in the mean time.
Howard
That does enlighten me a bit. If one side of your Iron Condor loses 20% of the trade capital you close it and take the loss. At the same time, then such index movement would also make the plus money spread in the Iron Condor, probably reach 80% or better of cap maximum, so you roll it.
Now why would you bother to roll a winning trade? A win is a win! Why roll into another month, in which possibly the location of the spread may not be favorable. Why not wait until you can pick your time and location for the next spread?
I can see diversifying across different indexes allows you to trade more trades, I.C.´s and keep your trades smaller capital amounts and avoid confusing the software with mixed Iron condors in one index. The smaller amounts involved for your gross capital would be protected as any loss would be relatively small on any individual trade that way.
Still I have seen the OEX run 15 or 20 points in half a day. You would have to be moving pretty fast to get out at the 20% of trade capital for a spread in such a case. But the 20% does answer one valuable question anyway, on your methodology.
That does enlighten me a bit. If one side of your Iron Condor loses 20% of the trade capital you close it and take the loss. At the same time, then such index movement would also make the plus money spread in the Iron Condor, probably reach 80% or better of cap maximum, so you roll it.
Now why would you bother to roll a winning trade? A win is a win! Why roll into another month, in which possibly the location of the spread may not be favorable. Why not wait until you can pick your time and location for the next spread?
I can see diversifying across different indexes allows you to trade more trades, I.C.´s and keep your trades smaller capital amounts and avoid confusing the software with mixed Iron condors in one index. The smaller amounts involved for your gross capital would be protected as any loss would be relatively small on any individual trade that way.
Still I have seen the OEX run 15 or 20 points in half a day. You would have to be moving pretty fast to get out at the 20% of trade capital for a spread in such a case. But the 20% does answer one valuable question anyway, on your methodology.
Howard
I didn´t get the situation in which you were worried about a GAP, or
the comment about the spread expiring worthless. Meaning I presume you closed it because it lost 20% of capital of the trade ?
I can guess the increase of the good side of the IC would be more than the 20% loss though. A rollover I understand saves money instead of closing the winning spread? Which may have something to do with the profit balance eliminating some commissions,etc. Never tried a rollover.
I didn´t get the situation in which you were worried about a GAP, or
the comment about the spread expiring worthless. Meaning I presume you closed it because it lost 20% of capital of the trade ?
I can guess the increase of the good side of the IC would be more than the 20% loss though. A rollover I understand saves money instead of closing the winning spread? Which may have something to do with the profit balance eliminating some commissions,etc. Never tried a rollover.
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