There is only a little clue of what goes into it from the interviews that ToS has with the developer. However, I chose it because it closely approximated my own calculation which used Monte Carlo methods to estimate what I called Probability of Reaching and used days to expiration and implied volatility along with some of the other usual suspects used in option value calculators.
HowardCohodas Index Options Credit Spread Trading Journal
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As I see it, when a Bull Trend is going to change, you better be pretty good at sensing it.
Having credit spreads over several months, leaves you wide open to wipe out. The further you go out, the less likely you are to have gained enough to even break even on a credit spread.
Lets assume you have a dozen credit spreads in Bull Put Credit Spreads under a Bull Market. If they are 60 or 90 days out, you are going to get hit when the market indexes takes a drop. Everything goes down, at least 98 % of it. The exceptions are not enough to worry about and would be in individual stocks. I just don´t yet see how closing them before hand, or after the event is going to get you out without big losses. You can make money with credit spreads if you are good enough to anticipate the Bull Market ending and swiveling on a dime. A 5% or 10 % index drop you need to be out of bull PUT credit spreads completely before hand and if you have credit spreads scattered over three months, you just are not going to be able to close them in anticipation of the Bear Market drop, even if it is just a deep correction without losses.
On the other hand, if you are in short term credit spreads, you might be able to close them BEFORE the drop, or have less and less of them. It is easy to make money with credit spreads in a Bear Market drop by just piling on the Bear Call Spreads, by laddering down, on each pull back. But you need same month, or even weeklies to do this.
On the other hand, if you are smart enough to ladder down a Bear Market with Bear Call credit spreads on each pull back, or following a simple 45 degree trend line on a chart, it is a waste of cash money, or margin to be doing credit spreads. You should be just doing straight PUT options. The profit is bigger, supposedly unlimited to the drop, why waste your money on a limited profit spread at 3% or 5% when your straight PUT options will earn you 30% to 50 % for the same moves?
Credit speads in my view are only good in a long slow Bull Trend. They allow you to collect time decay, without losing option value to TIME DECAY. Even then, a monthly would be best. Even so, sharpening your skills at reading the market and playing the short term corrections in a bull trend with straight options, will still return you 30% or so on each short term reaction and back to the trend. In and out in four days instead of months and cycle your money more often.
Credit spreads are supposedly safer trading, lesser profit, in a trend. But fine tuning your chart reading skills will get you more and safer profit in the long run, just making short moves. Heck one trade a month, will do better than playing credit spreads. There is the rub, people cannot learn the patience to only play a sure thing. It´s impatience and greed that wipe you out.
Having credit spreads over several months, leaves you wide open to wipe out. The further you go out, the less likely you are to have gained enough to even break even on a credit spread.
Lets assume you have a dozen credit spreads in Bull Put Credit Spreads under a Bull Market. If they are 60 or 90 days out, you are going to get hit when the market indexes takes a drop. Everything goes down, at least 98 % of it. The exceptions are not enough to worry about and would be in individual stocks. I just don´t yet see how closing them before hand, or after the event is going to get you out without big losses. You can make money with credit spreads if you are good enough to anticipate the Bull Market ending and swiveling on a dime. A 5% or 10 % index drop you need to be out of bull PUT credit spreads completely before hand and if you have credit spreads scattered over three months, you just are not going to be able to close them in anticipation of the Bear Market drop, even if it is just a deep correction without losses.
On the other hand, if you are in short term credit spreads, you might be able to close them BEFORE the drop, or have less and less of them. It is easy to make money with credit spreads in a Bear Market drop by just piling on the Bear Call Spreads, by laddering down, on each pull back. But you need same month, or even weeklies to do this.
On the other hand, if you are smart enough to ladder down a Bear Market with Bear Call credit spreads on each pull back, or following a simple 45 degree trend line on a chart, it is a waste of cash money, or margin to be doing credit spreads. You should be just doing straight PUT options. The profit is bigger, supposedly unlimited to the drop, why waste your money on a limited profit spread at 3% or 5% when your straight PUT options will earn you 30% to 50 % for the same moves?
Credit speads in my view are only good in a long slow Bull Trend. They allow you to collect time decay, without losing option value to TIME DECAY. Even then, a monthly would be best. Even so, sharpening your skills at reading the market and playing the short term corrections in a bull trend with straight options, will still return you 30% or so on each short term reaction and back to the trend. In and out in four days instead of months and cycle your money more often.
Credit spreads are supposedly safer trading, lesser profit, in a trend. But fine tuning your chart reading skills will get you more and safer profit in the long run, just making short moves. Heck one trade a month, will do better than playing credit spreads. There is the rub, people cannot learn the patience to only play a sure thing. It´s impatience and greed that wipe you out.
Ahhh the smell finally creeps in. Seems Howard has been trading credit spreads a few years and now has reach the expert level to do paid coaching and teaching through his website. As someone with experience in this, you could put all the fancy spreadsheets and use the word propietary but you are basically selling far OTM credit spreads and hoping you can get out before the you know what hits the fan.
Probability of touching is not some fancy metric but just using basic Black Scholes (a theoretical pricing model). It is no different tha using deltas as a substitute for % prop of expiring ITM. The big mistake here is you do not have to have a short strike touched for you to lose money as a vol move could turn a $1.50 credit spread into a $3.00 cost to buy back, especially if it is SPX or lower volume weeklies. I used different probabilites to help me select strikes and manage the trades but be careful relying on them as a crutch.
This strategy cannot be taught in a way that will make the student really understand the risk and how to look at a steaming locomotive of a market and get out in time. I often told people there is no magic hedge or adjustment. The real secret is simply managing risk and if you do that you can almost blindly choose strikes for the IC.
Good luck, but please don't try and sell a coaching service or teaching course on OPTIONS when you feel you simply mastered credit spreads. Options are so much more sophisticated than credit spreads.
Probability of touching is not some fancy metric but just using basic Black Scholes (a theoretical pricing model). It is no different tha using deltas as a substitute for % prop of expiring ITM. The big mistake here is you do not have to have a short strike touched for you to lose money as a vol move could turn a $1.50 credit spread into a $3.00 cost to buy back, especially if it is SPX or lower volume weeklies. I used different probabilites to help me select strikes and manage the trades but be careful relying on them as a crutch.
This strategy cannot be taught in a way that will make the student really understand the risk and how to look at a steaming locomotive of a market and get out in time. I often told people there is no magic hedge or adjustment. The real secret is simply managing risk and if you do that you can almost blindly choose strikes for the IC.
Good luck, but please don't try and sell a coaching service or teaching course on OPTIONS when you feel you simply mastered credit spreads. Options are so much more sophisticated than credit spreads.
So discovering BSM -> touch and expiration probability implies some edge? What happens to your PNL when you gap to your short strikes? What if vol explodes? Can you ever get out w/o losing 5, 10, 20x your credit?
The inexperienced typically enter the business trading outrights, get tired of losing and begin spreading. They discover verticals and look to massage strikes and widths upon discovering the output of a 40yo algorithm.
inexperience -> losses -> experience.
Do not confuse hit rate with expectancy. Hit rate and risk of ruin are inversely proportional in what you're trading.
I stopped saying that when people realized I was stretching the truth.
(I was referring to the penis thing, not the option trading)
Another thing, that Dashboard, seriously?
In the opening scene of Saving Private Ryan it's raining bullets on Omaha Beach and Tom Hanks asks this guy WTF is he doing on the beach with a typewriter. The guy says something like "50th field operations typewriter battalion sir!, here to setup field operations!" Tom Hanks responds "GET RID OF ALL THAT CRAP".
In a big move that Dashboard isn't going to help risk management besides tell you your p/l is shot to pieces. Don't be afraid to get in the underlying.
That is all. Sick of all the iron condor pushers who pretend the underlying doesn't even exist/won't/scared to trade it. Dime a dozen all over the internet.
In the opening scene of Saving Private Ryan it's raining bullets on Omaha Beach and Tom Hanks asks this guy WTF is he doing on the beach with a typewriter. The guy says something like "50th field operations typewriter battalion sir!, here to setup field operations!" Tom Hanks responds "GET RID OF ALL THAT CRAP".
In a big move that Dashboard isn't going to help risk management besides tell you your p/l is shot to pieces. Don't be afraid to get in the underlying.
That is all. Sick of all the iron condor pushers who pretend the underlying doesn't even exist/won't/scared to trade it. Dime a dozen all over the internet.
+1
Love the Private Ryan analogy. Coach, your penis joke was funny too.
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