I evolved to believe it prudent to take some diversification measures to help ameliorate black swan events. I am working on some additional measures as well. Can't keep the engineer from tinkering. :eek:
HowardCohodas Index Options Credit Spread Trading Journal
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I'm an engineer too, so I know just what you mean.
Howard
When you reached 102% it got me thinking. I am not at all convinced your method will not result in severe losses in more volatile times.
Take this suggestion from a friend. If your real cash is up 102% now, and it has been the result of a bull market run. You are faced with a dilemma. It comes to us all at some time, especially those compounding their capital. Decisions! Decisions! Decisions!
The decision is to continue compounding? Which is a decision not based on smarts, but based on GREED and IMPATIENCE.
The other half of the decision is to take out your original capital and lose six months compounding earnings, but be working forever more on FREE CAPITAL you have earned. If you lose it compounding, nothing lost. The decision is to go with greed and impatience, versus losing six months of initial proving work.
Be interesting to see how you decide? ( been there done that
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When you reached 102% it got me thinking. I am not at all convinced your method will not result in severe losses in more volatile times.
Take this suggestion from a friend. If your real cash is up 102% now, and it has been the result of a bull market run. You are faced with a dilemma. It comes to us all at some time, especially those compounding their capital. Decisions! Decisions! Decisions!
The decision is to continue compounding? Which is a decision not based on smarts, but based on GREED and IMPATIENCE.
The other half of the decision is to take out your original capital and lose six months compounding earnings, but be working forever more on FREE CAPITAL you have earned. If you lose it compounding, nothing lost. The decision is to go with greed and impatience, versus losing six months of initial proving work.
Be interesting to see how you decide? ( been there done that
)Quote from falconview:
Howard
When you reached 102% it got me thinking. I am not at all convinced your method will not result in severe losses in more volatile times.
Take this suggestion from a friend. If your real cash is up 102% now, and it has been the result of a bull market run. You are faced with a dilemma. It comes to us all at some time, especially those compounding their capital. Decisions! Decisions! Decisions!
The decision is to continue compounding? Which is a decision not based on smarts, but based on GREED and IMPATIENCE.
The other half of the decision is to take out your original capital and lose six months compounding earnings, but be working forever more on FREE CAPITAL you have earned. If you lose it compounding, nothing lost. The decision is to go with greed and impatience, versus losing six months of initial proving work.
Be interesting to see how you decide? ( been there done that
- I practice what I teach. I teach that a trader should never trade with funds that he cannot afford to lose. I can afford to lose it all without much impact on my life style. I would be unhappy, but I can afford it.
- Since trading with real money there have been up months, sideways months and down months during relatively low volatility. I have paper traded during much higher volatility times and have some confidence that I will obtain similar results. But it's only the real money trading that counts. PoT has a volatility component and therefore should adjust to higher volatility times. The real danger lies during transition where I have entered my spread trades and volatility increases dramatically before they have expired.
- If the rules remain the same, then the risk remains the same. If all my other assets turn to dust and I can no longer afford to lose all of this account, the strategy risk remains the same, but my life style takes on the same risk as the trading risk. This is the true greed dilemma. Prudence would dictate removing enough funds to replace what has been lost elsewhere. That is my plan. Will I execute it. Only when that event is encountered will I tested.
There *is* that possibility of the unlikely event that one day the market gaps down (or up) through both strikes of your spread. In such a scenario, you may not have had the chance to get out at a 20% stop loss leading up to the gap move. This would most likely happen just when you said, during a period of increased volatility after you've put on spreads during lower volatility. In that case you'd be uncomfortably close to a potential gap move.
In a big gap move, it's truly disastrous.
In a big gap move, it's truly disastrous.
The "black swan" event is always a possibility. Here are the protections I currently teach and employ:
- Completing an Iron Condor not only provides extra return without additional capital requirements, but also helps place your portfolio in a delta neutral (without market bias) position.
- If one spread is overcome by the underlying instrument, the other is at or near 100% of its potential profit. Rolling provides for not only locking in those profits, but also collecting another credit. This does not overcome the potential loss, but it does take some of the sting out. This is the space element of my time-space-market diversification strategy.
- I recommend installing a circuit breaker at 1% before the short strike of a spread. The spread will be closed with a contingency market order. This "automatic" close order is a good idea in case you are unavailable to pay attention during surprise moves. This typically results in a 20% to 30% loss of capital at risk. A flash crash might exceed these limits. The down side is that the flash crash recovered so quickly that the circuit breaker actually caused an unnecessary loss. That's just the cost of prudent protection.
- I advocate being in more than one monthly series at a time. A sudden market move will likely take out the nearest series. The farther series may survive. This is the time element of my time-space-market diversification strategy.
- I recommend three indexes; NDX, RUT and SPX. NDX and SPX are highly correlated. I currently trade options on NDX and RUT. This is the market element of my time-space-market diversification strategy.
- A detailed analysis of these protections indicate that a typical (if there is such a thing as typical) black swan event may injure my account in the 10% range.
- If markets cease to trade, we are all toast. Haven't engineered a solution for this event.
- Finally, I am working on an insurance plan involving LEAPS that may protect my account even more. It's still a work in progress so I am not ready to make it a part of my active strategy.
Your thoughts on this would be appreciated.
howard, back in 01 i was doing your type of spread trades. let's just say -50 spx over multiple days will destroy you no matter how much you have engineered. vol rises far more than you planned, lines in the sand get breached, etc. i know many intelligent traders who felt they were ready and protected get killed also. in any case i wish you luck because that is what you will need on a 50% vol rise.
I can´t seem to copy and paste. But the last sentence in No. 2 statement is the crux indeed.
Bear plunges seem to occur in one day, or 2 or 3 weeks overall.
Bear plunges seem to occur in one day, or 2 or 3 weeks overall.
Howard
In my limited one year experience of trading credit spreads, last year, there is no difference between indexes when a Volatility rise occurs, or Bear Plunges. So being spread between indexes does not protect at all. Just my limited view.
Whats the saying? All ships float equally with the tide.
In my limited one year experience of trading credit spreads, last year, there is no difference between indexes when a Volatility rise occurs, or Bear Plunges. So being spread between indexes does not protect at all. Just my limited view.
Whats the saying? All ships float equally with the tide.
Please be more specific so that I can learn from your experience. I did not back test using 2001 data so I would like to test my rules against the period you allude to.
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