HowardCohodas Index Options Credit Spread Trading Journal

[HowardCohodas]

Quote from nLepwa:

How do you compute your returns?

What's the r:r ratio when you enter/roll a spread?

Ninna

Quote from falconview:

Howard

At what point do you decide to rollover?

I apologize to everyone reading this thread for being so far behind on things and not starting the post series on the details of my methods. Thanks for your patience.

Let me give some short answers to these questions, with longer contextual material to follow.

Credit spreads, by their nature are a high probability, high return and high risk play (from the point of the capped return to capped loss perspective). If I'm aiming at a 10% return when an Iron Condor is formed, the return is capped at 10% and the loss is capped at 90%. What makes this attractive, none the less, is the high probability of success, rolling, and the methods for managing trades that get into trouble.

Rolling mitigates the maximum loss since an additional credit is collected on the same quarantined funds. Also consider that the average Iron Condor yields over 20% and several have been around 50%. I gave some statistics of performance a few posts back.

When a spread has reached at least 80% of it's capped return, I begin looking for an opportunity to roll. However, before I close the spread I make certain that there is an attractive spread available to replace it. My entry rules for a replacement spread are identical to the rules for entering the initial spread.

 

[falconview]

Howard

When a spread has reached at least 80% of it's capped return, I begin looking for an opportunity to roll. However, before I close the spread I make certain that there is an attractive spread available to replace it. My entry rules for a replacement spread are identical to the rules for entering the initial spread.

That is an interesting concept. New to me. How long have you been doing this, with paperf money,or cash?

 

[falconview]

If you have Iron Condors returning 20% you must be selling them early in the month. How early?

 

[HowardCohodas]

Quote from falconview:

That is an interesting concept. New to me. How long have you been doing this, with paperf money,or cash?

I back-tested with 5 years of data. I paper traded for 5 months. I've been cash trading since Aug 2, 2010.

 

[HowardCohodas]

Quote from falconview:

If you have Iron Condors returning 20% you must be selling them early in the month. How early?

The 20% comes as a consequence of rolling.

For monthlies, I enter a new series around 59 days before expiration when the quarantined funds are released from the just expired series. I want to be ahead of the knee in the time decay curve. Monthlies are the only ones that exist long enough to have roll opportunities.

 

[nLepwa]

Quote from HowardCohodas:


Credit spreads, by their nature are a high probability, high return and high risk play

No, they have high probability of low return.
The r:r is very low (as you explain in your example) therefore the probability of success is very high.

Are you reporting your returns as percentage on the capital at risk or on the total account size?

Ninna

 

[HowardCohodas]

Quote from nLepwa:

No, they have high probability of low return.
The r:r is very low (as you explain in your example) therefore the probability of success is very high.

Are you reporting your returns as percentage on the capital at risk or on the total account size?

Ninna

Percentage of capital at risk. I no longer report my account growth as that adds money management to the discussion and I would like to exclude that aspect for the time being. I do report month on month return only to illustrate the impact of commissions and reserve capital. This brushes on money management but does not immerse ourselves in it.

If over 20% return every 60 days is low return, I need to recalibrate my scale.

 

[nLepwa]

Quote from HowardCohodas:

Percentage of capital at risk. I no longer report my account growth as that adds money management to the discussion and I would like to exclude that aspect for the time being. I do report month on month return only to illustrate the impact of commissions and reserve capital. This brushes on money management but does not immerse ourselves in it.

If over 20% return every 60 days is low return, I need to recalibrate my scale.

Since that 20% is on capital at risk it is actually low return.
If you have proper money management (rule of thumb, risk 1% of your account per trade for example) then your actual return is 0,2% over 60 days.

By your measure, a trend following strategy for instance with a modest 1:3 has a "return" of 200% for each succesful trade. Ten times higher than the IC return.
Of course, since market participants are smart and mostly efficient all of this is priced in the market. And consequently the probability of a winning trade is lower with the trend following strategy.

Ps. that is why we usually report risk-adjusted returns so that we all have a basis for comparison. I would encourage you to do so.

Ninna

 

[HowardCohodas]

Quote from nLepwa:

Ps. that is why we usually report risk-adjusted returns so that we all have a basis for comparison. I would encourage you to do so.

Ninna

I'm out of my depth here. Can you provide a reference so that I can look into it.?

 

[nLepwa]

Quote from HowardCohodas:

I'm out of my depth here. Can you provide a reference so that I can look into it.?

You can start with this:
http://www.investorglossary.com/risk-adjusted-return.htm
http://www.investopedia.com/terms/r/riskadjustedreturn.asp

Selling IV is one of the hardest way to obtain positive expectancy in my experience. It requires very deep understanding of the market mechanisms and volatility.

I wonder how you could get positive expectancy when you're not aware of the basics.
I'm looking forward to reading how you get it (if you do actually get it).


Ninna