HowardCohodas Index Options Credit Spread Trading Journal

[falconview]

Maverick

Thankyou for the honor. That is the only thing I have graduated from I guess? I spent my life as a professional beach bum and yachtie. Mind you, if I had to live it over again, I would do it the same way.

 

[falconview]

Well the day is over and it went well. If you figure the wudda, cudda and If, components. I might have doubled the days earnings if I had got out at the high volatility this morning. Never mind.
It is still February and I am still officially within my 3 month period and the return is now 124%. Everybody says it won´t be so good when real money comes into play. Still it is a ball park figure.
Howard is returning 102% for a five or six month period in credit spreads.

Now I wait on TOS to tell me if and when my account is activated and I can authorize my cheque to be put in the mail.

 

[arabianights]

Quote from Rodney King:

Sure, if CBOE is willing to install a treadmill in the pit for him.

Shame there's no rec system here, cause I'm lulllllllllllzing

 

[newguy05]

Take it easy on howard guys, criticize his trade plans but leave the treadmill out of it. I mean it's GENIUS putting a $20 plastic on top of a treadmill and sell it for $500, i bet you all wish you thought of it.

The conclusion I came to, was it is a heck of a lot SAFER just buying and selling straight options.

you cant just say that, it really depends on the situation. Also selling naked vs spread, spread is safer unless you talking about cash covered.

You have spot traders using option as leverage/hedge, you have option amateurs using memorized combos trying to plug them in like some sort of jigglesaw puzzle, then you have the pros who trade the vol/skew and greeks.

 

[HowardCohodas]

 

[HowardCohodas]

In spite the recent jump in volatility, causing me to exit some positions at a loss, Feb 2011 turned out to be my best month trading real money with this strategy.

 

[HowardCohodas]

Quote from daveyc:

Hi Howard!

I admit I have not read all of the posts because of the #. I do trade these Iron Condors but have had difficulties in staying in my trades because of this huge move higher meaning adjustments to my calls. When I have adjusted, I like to move up a portion of the puts to help pay for the adjustment among others. Sometimes I just add bull/puts and therefore my risk and margin. My goal has been to keep the delta on the whole position as neutral as posible but at some point you gotta let the trade work.

At what point do you consider an adjustment? If you sold 10 deltas and see the short option at 25 deltas?

My trading unit is a credit spread. I treat an Iron Condor as an artifact with the benefits of adding the companion spread with no additional capital requirement and somewhat neutralizing delta.

I experimented with using the Greeks as a spread management tool, however I found it added no value to the outcomes over what I do, it is more complicated to understand and it can be more complicated to execute.

My adjustments plan is driven by the Credit Spread Management Dashboard. It divides credit spread management into two areas of adjustments to consider; opportunities and jeopardies. Opportunities include:

• Adding a credit spread to a spread that does not yet have a companion to form an Iron Condor
• Rolling a spread that has already achieved 80%+ of its potential.

Jeopardies include:

• Excessive Probability of Touching
• Days to expiration
• At risk P/L

Quote from daveyc:

I wonder if you have already mentioned using the Weeklies in any attempt to hedge risk if you see the market trending higher or lower, for example. If you have an Iron Condor on NDX, for example, and its ripping higher, would you consider a big market cap like AAPL and sell a Weekly bull/put to help pay for any adjustment you may want to do? Same question on SPX, would you use XOM and a similar trade to hedge some of the risk? I am quickly becoming a huge fan of the Weeklies.

I do not use weeklies as a hedge. I use them as opportunities to repeat profits more frequently. My results so far is that, with respect to the way I trade credit spreads, they act much the same as monthlies in their last week before expiration. In both cases, spreads in this time of their life require more intense monitoring as they can go south quickly. In some cases I have even been able to add a roll to increase profits even more, or to mitigate a loss. I still trade weeklies in small money mode. However repeating this frequently, weeklies still makes a noticeable contribution to my monthly performance.

Quote from daveyc:

I did read somewhere on this topic that there were concerns with having a large vega risk. I wonder if you have considered using Calendar spreads to reduce the vega risk as well as way OTM puts?

Just a few questions, I have met you on another forum.

Happy trading,
Dave

I do not at the moment, but I am always interested in new methods to improve management to either add profits or mitigate risks.

That said, it seem that Theta quickly dominates Vega as expiration nears. After all, credit spreads are built to take advantage of time decay.

 

[HowardCohodas]

Quote from stevegee58:

Actually hedging a credit spread is pretty straightforward.

Say you sold a put credit spread with a delta was 0.10. You're bullish to neutral on the underlying, as reflected in the positive delta.

Instead of the underlying cooperating and moving up or staying about the same, it starts moving down toward your short strike. As the underlying moves closer, your delta increases. As part of your trading plan you could have a rule that if the credit spread's delta gets around 0.25 you either bail or hedge.

To hedge, you'd just buy a put (long put = negative delta) for the same delta as the troubled credit spread. What about theta, you ask? You can buy a put that's the next month out from your credit spread so that the theta isn't as hot as the credit spread's.

So say you have a March credit spread that you opened with a delta of 0.10 and now it's 0.25 due to adverse movement of the underlying price. You could buy the April put that has a delta of -0.25 to neutralize the adverse delta of the credit spread.

When do you take off the hedge? When the credit spread's delta subsides due to the underlying moving back up would be one way. Maybe you could take if off when the credit spread's delta returns to 0.15 or 0.10 or whatever your analysis says is best. If your credit spread is totally overrun, you'd just leave the hedge put on.

Yes, this sort of thing costs money, but it sure beats having your whole credit spread overrun with no protection.

I find hedging as a management tool dissatisfying. It attempts to make a deteriorating situation less deteriorating. It may work for some, but for me, it is not compatible with my psychological profile. If the situation sucks, bail and live to fight another day. You must survive to thrive.

On the other hand, I am experimenting with methods of insurance at entry to mitigate the risk of a sudden price decline of the underlying. It is not yet ready for prime time. Insurance cost money. Does it have a positive expectation? I don't know yet.

 

[HowardCohodas]

Quote from daveyc:

Thats a good answer, Steve. In your example, by buying the next month Put (creating a calendar) is a good way to help the position and a good adjustment especially if the market is going down. I would also add a new bear/call spread to help pay for the next month Put.

There are a few different adjustments that could get the delta neutral on your overall portfolio including using the Weeklies and buying/selling the underlying or its equivalent.

I have also read somewhere in this longggg thread about whether or not the OP has an edge or what may be his edge. I know its not that difficult in putting on a trade but the whole game and art form comes from adjustments and there is no person out there that has an advantage over another. You basically want to open an Iron Condor when there is a bump up in volatility to allow enough distance and more credit on the trade.

Trading credit spreads is not as easy as it may appear at first glance and should be watched closely.

Dave

I find managing credit spreads easier than some people fear, but more risky than many gurus tell you when selling their seminar. My focus is always to simplify until there is a significant deterioration in results. The clear implication is that I will sacrifice some return for simplicity. Simplicity is key to crisis management. Trying to execute a complex risk mitigation strategy in the middle of a crisis will likely lead to adding to the problem.

I am a lapsed private pilot. The development of the Dashboard and the simplification of my management rules are based on what I learned from the results of plane crash investigations.

Any edge I may have is not related to competing against any other person, it is related to my competing with the market. Time decay is the mechanism of developing profit. The edge, if any, is the management methods to take advantage of opportunities and escape from risks before significant harm is done.

 

[HowardCohodas]

Quote from Maverick74:

The best hedge for a credit spread is to buy it back in its entirety. Don't try to make things more complicated then they are. Ego has sunk many a trading ship.

Exactly!