HowardCohodas Index Options Credit Spread Trading Journal

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Quote from trefoil:

In general, by the way, Black Scholes (Bachelier-Thorp, if you're Taleb) is fiction. A useful fiction for quick and dirty risk profiling, which according to Taleb is why the formula was derived in the first place, but a fiction nevertheless.
IC's depend on it being true. That's another big knock against this strategy.
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Why do iron condors depend on BS being true? The existence of the volatility smile shows that the options an iron condor trader buys and sells are not priced according to BS. (If BS applied all strikes in the same month would have the same IV.) These well OTM options are, in general, more expensive than they would be if BS were used. Since an IC trader is a net seller he is compensated for the fact that the short strikes have a higher probability of being hit than the lognormal price distribution assumption would have it. Of course, that still doesn't imply that an IC trader has an edge, just that the odds are about even overall. If an option trader can't judge direction, volatility, or both better than chance he's unlikely to be successful no matter what type of trading he does. But this has nothing to do with whether BS or some other pricing model is more appropriate.

It seems that any time an option trading thread gets long enough somebody comes in and bashes BS, as if everybody concerned wasn't already aware that it's a crude approximation to the truth. I'm sure this isn't news to Howard Cohodas.
 
As an amateur and a simple guy, I´m not too fond of complicated strategies. Atticus mentioned sell the body and buy the wings. He has emphasized that you BUY the wings.

Think you could give an example or two? So I can picture it, in my teeny mind, without trying to understand the technicals underlying?
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Re HOWARD and some of his perceived HYPE! I get nervous when he talks about IF you have an IRON CONDOR and a Black Swan wipes out one side. You can rollover into another month and even earn some premium and the winning side of the Iron Condor will offset some of your losses.
Since I traded last year credit spreads for 8 or 9 months. I may not have a grasp on the GREEKS, or other technical jargon. But I like to sense you can MAKE SOME MONEY with what you are doing. I like to follow the money trail. That said:

When HOWARD qualifies his statement about an Iron Condor, that the winning side will offset some of your loss on a losing side. Technically he is correct, but if you follow the money trail, it is NONSENSE.

A credit spread earns an average of 3% for a 100% at risk. If you have an IC you can earn around 6% for a risk of 100% ( one side is free of margin ) You still have additional costs in commissions on BOTH sides. Your net might be 4% or 3.5% or something.

If a BLACKSWAN event, sudden move wipes out one side of an Iron Condor, you lose TWO SETS OF COMMISSIONS. I forget what that is right now, but around 15% or so. Somebody can figure it out again. The remaining credit spread will earn 3% of the 100% invested. As I type this out, I´m trying to relive this picture in my mind and I might be a bit wrong after all, I think? You are going to end up with a net loss of 12%, or whatever the commissions are? The IRON CÖNDÖR cannot make enough money to make the risk worthwhile, I think I was thinking, if ONE SIDE is totally wiped out in a sudden surge. Hmmmmnnnn! Re-thinking this now that I´m typing it. So, in an IC situation, you maximum loss would be around 12% of margin used. Not bad after all, now I look at it here as I type.
Rolling over the lost credit spread into another month that actually earns MORE premium might even reduce your loss even more? By 3% - less 1% commission or something like that, for a net gain of 2% on the next credit spread margin in the next month.
So your total loss would be around 10% of margin and if you got that new credit spread into a fresh Iron Condor, you could continue losing only 10% of your margin per month and who knows you might get lucky and actually make 6% before commissions and end up with another 4% or so profit, that would in a few more months of rolling over, with working your way out of that 10% loss hole?
Then of course POSITION SIZE comes into play, as one 3% isn´t necessarily equal to another 3% in position size for profit.
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Quote from falconview:

As an amateur and a simple guy, I�m not too fond of complicated strategies. Atticus mentioned sell the body and buy the wings. He has emphasized that you BUY the wings.

Think you could give an example or two? So I can picture it, in my teeny mind, without trying to understand the technicals underlying?
_________________________________

Re HOWARD and some of his perceived HYPE! I get nervous when he talks about IF you have an IRON CONDOR and a Black Swan wipes out one side. You can rollover into another month and even earn some premium and the winning side of the Iron Condor will offset some of your losses.
Since I traded last year credit spreads for 8 or 9 months. I may not have a grasp on the GREEKS, or other technical jargon. But I like to sense you can MAKE SOME MONEY with what you are doing. I like to follow the money trail. That said:

When HOWARD qualifies his statement about an Iron Condor, that the winning side will offset some of your loss on a losing side. Technically he is correct, but if you follow the money trail, it is NONSENSE.

A credit spread earns an average of 3% for a 100% at risk. If you have an IC you can earn around 6% for a risk of 100% ( one side is free of margin ) You still have additional costs in commissions on BOTH sides. Your net might be 4% or 3.5% or something.

If a BLACKSWAN event, sudden move wipes out one side of an Iron Condor, you lose TWO SETS OF COMMISSIONS. I forget what that is right now, but around 15% or so. Somebody can figure it out again. The remaining credit spread will earn 3% of the 100% invested. As I type this out, I�m trying to relive this picture in my mind and I might be a bit wrong after all, I think? You are going to end up with a net loss of 12%, or whatever the commissions are? The IRON C�ND�R cannot make enough money to make the risk worthwhile, I think I was thinking, if ONE SIDE is totally wiped out in a sudden surge. Hmmmmnnnn! Re-thinking this now that I�m typing it. So, in an IC situation, you maximum loss would be around 12% of margin used. Not bad after all, now I look at it here as I type.
Rolling over the lost credit spread into another month that actually earns MORE premium might even reduce your loss even more? By 3% - less 1% commission or something like that, for a net gain of 2% on the next credit spread margin in the next month.
So your total loss would be around 10% of margin and if you got that new credit spread into a fresh Iron Condor, you could continue losing only 10% of your margin per month and who knows you might get lucky and actually make 6% before commissions and end up with another 4% or so profit, that would in a few more months of rolling over, with working your way out of that 10% loss hole?
Then of course POSITION SIZE comes into play, as one 3% isn�t necessarily equal to another 3% in position size for profit.
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This is a disappointing post from you. Although premised by your "simple guy" persona, you go on to state things as if your conclusions are authoritative. I'll give you the benefit of the doubt that you do not intend the certainty your tone implies.

Many of your premises are false, (more on that below), thus leading you to false conclusions. Many of these things I have explained based on your previous questions. Each time you have asked the same question or a similar question I have tried to explain it differently rather than louder. I have used words, tables, my dashboard, explanations of my dashboard, etc. Yet you still don't seem to understand some of the fundamental principles of my strategy. You don't even understand what atticus means or implies by "buy the wings." Hint: learn about a strangle.

That you don't understand is OK. That you go on to draw conclusions after you admit you don't understand is a disservice to those just beginning to learn what is going on here.

To illustrate, let me cite just one example. You still do not understand the rolling component of the strategy. "You can rollover into another month," is not an element of my strategy except at expiration of a series. Nearly each paragraph is begun with a false premise. Therefore, your conclusions, right or wrong are not a derivative or your premises.

Lastly, your tone has taken on a harsh edge. Perhaps that is the influence of others who never do otherwise. You have shown that you can have civil dialog in the past. Let's get it back to that level so that the majority of my response will be about the strategy instead of about the majority of the contents of this response.
 
Quote from falconview:


When HOWARD qualifies his statement about an Iron Condor, that the winning side will offset some of your loss on a losing side. Technically he is correct, but if you follow the money trail, it is NONSENSE.

A credit spread earns an average of 3% for a 100% at risk. If you have an IC you can earn around 6% for a risk of 100% ( one side is free of margin ) You still have additional costs in commissions on BOTH sides. Your net might be 4% or 3.5% or something.
More...

There's the rub. The nature of the marked PNL curve makes the position virtually impossible to hedge w/o the hedge becoming a pure delta-risk.

As time passes, the local slope of "bad" greeks (underlying price +/- 1 StdDev) improves slightly due to theta(synthetic vol), but that doesn't mitigate losses at the strikes, it simply increases the otm slope. There isn't any juice in the spread from inception to tempt you to pull it early.

Howard won't answer question about risk because he won't accept the possibility of an outlier. A calendar spread is a palliative, partial-hedge. To trade the hedge large enough assumes that the calendar deltas won't invert (short gamma risk), and that the delta position won't kill it on a counter-move (index rally), as it becomes pure back month delta (front month trades to pennies).
 
Quote from atticus:

There's the rub. The nature of the marked PNL curve makes the position virtually impossible to hedge w/o the hedge becoming a pure delta-risk.

As time passes, the local slope of "bad" greeks (underlying price +/- 1 StdDev) improves slightly due to theta(synthetic vol), but that doesn't mitigate losses at the strikes, it simply increases the otm slope. There isn't any juice in the spread from inception to tempt you to pull it early.

Howard won't answer question about risk because he won't accept the possibility of an outlier. A calendar spread is a palliative, partial-hedge. To trade the hedge large enough assumes that the calendar deltas won't invert (short gamma risk), and that the delta position won't kill it on a counter-move (index rally), as it becomes pure back month delta (front month trades to pennies).
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Hmmm.

My take is that atticus won't read what Howard has answered about risk. I leave it as an exercise to the reader to ascribe motives.
 
Quote from HowardCohodas:

Hmmm.

My take is that atticus won't read what Howard has answered about risk. I leave it as an exercise to the reader to ascribe motives.
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I need you to stay quiet about the massive edge in these credit spreads. It's one massive disinformation campaign on my part.
 
Howard

As you say I was assuming some ideas, but when I wrote it out, in my essay, found out that the idea was not necessarily true. Only partly true and not nearly as true, or as bad as I thought it was. Sorry that didn´t come across. I was not intending to be harsh.

I´ll assume you and I think a bit in different ways, in relating to the effects of different trades. When you say stuff, I have to put it into my frame of reference. I´m a kind of hands on person and learn by experience, more than modeling. Built a bunch of yachts in my life, in wood, fiberglass and ferrocement. For a self taught marine architect, and shipwright, you learn some truths about things. Without getting technical. If it looks good, then it is good in yacht building. If it doesn´t look good for instance on a wood model, then your mathematics is screwed up. You better go back to the lofting platform.
Another way of building, is what in the jargon of the trade we call CUT & FIT. The premise being that you correct a mistake a smidgen at a time, because you can always take more off, but you can´t put it back on. Anyway this life of mine taught me a different way of going at things. As an engineer you are mathematical. Don´t get offended by ATTICUS critiques. Your stuff is amateurish compared to what he is talking and mine is not even in the ball park. I appreciated ATTICUS taking the time to explain the STRADDLE and STRANGLE part for the wings. I did learn that last year from probably him or his associates on the forums. But tried them and screwed up, or the results did not work out in my frame of mind, as being worthwhile. So I consigned the stuff to the scrap heap,simply forgot it, as something I didn´t think worthwhile my time.
It´s sort of like computer stuff. Modeling is garbage in and you get garbage out. Now I know you love all this backtesting stuff. But I did that for a number of years and since I was a slow learner, lost a bit of money, working with premises from HISTORICAL DATA. Fact is you can get ideas from HISTORICAL DATA, but you can´t forecast the future from it. This is my OPINION, I´m not criticizing your methodolgy of working things out. Just that I probably wasted three to five years before I finally wised up. You can only ( for me anyway ) learn in REAL TIME in the future events, proving you right or wrong. Much slower hands on process and I understood you as doing exactly that. Trial and Error.

Lost myself here! Getting forgetful in my old age. Was trying to make a point, but even forget the point now.:confused:

At any rate, ATTICUS has come to similar conclusions about what works through a lot of study and EVEN MORE trial and error. Which is what you are going through right now. That said, my own trading philosphy comes down to PRICE. I keep trying stuff, then weeding out the stuff that doesn´t return enough profit, often enough. I think it was WILDER many years ago, said ONLY PRICE COUNTS. I´d go a little better and say PRICE, VELOCITY AND PRESSURE are my own particular conclusions. I believe in KISS. Keep it simple stupid, is the particular phrase with that acronym.
Shoot I´ve gone off on tangents here. Time to quit.
Rambling old man. Made $620 this morning in the OEX and the SPY. The practise account is up 136% this morning. Still waiting on the TOS guys. I.D. Verification giving me trouble. Sent them copies of my passports and my wifes is in her maiden name, but the account is in our married name. So had to photo copy the marriage certificate and I´m down in the Caribbean right now, fiddling with a 42 foot sailboat. Thinking of buying it. Guy who owned it got put in jail back in the USA and the local government is selling it. Anyway trying to do stuff when you travel and have no fixed address seems to aggravate the bureaucratic mind no end. It is a lot darned slower to accomplish too. Put back my live money trading to April now.

Anyway I am enjoying your FORUM Howard and all the really smart experienced guys that are chipping in here, particularly when they talk in basic 101. Nice to read about the GREEKS and PNL curves and all that. I just want to know if it makes money regular though, on a steady basis. Otherwise if it doesn´t work 100% of the time, I´m not interested, other than curiousity. I´m really curious to find out if you have actually discovered the
 
Martingales can occur on the x and y (time and price). They are defined by the high probability of success and the poor risk-reward. The relationship is linear (x=risk, y=hit-rate), which is representative of WHY THERE IS NO EDGE HERE. If you decrease the hit rate (narrow the strikes) you simultaneously decrease the max-risk. There is nothing inherently wrong with that (selling deep otm credit spreads) provided you limit the trading to a very small % of your portfolio. The problem lies in the delusion that the relationship is NOT linear. No manner of "dashboard" inputs is going to change that.

Don't allocate more than 10% of your portfolio to any strategy risking 10x your credit. It's not a difficult ratio to derive. The problem being that at 10% allocation you're not going to beat LIBOR on the portfolio, even if you're batting .1000.

Predictive bet variation is the only potential for edge. If you can predict vol you would increase size before it drops, and be out of the market before it rallies. Howard will reply that is his "innovation" yet to be discussed, but that's simply another expression of his cog. dissonance. His dashboard argues my point.

Anyone who can successfully predict vol and/or price would naturally avoid these spreads. The opportunity loss is simply too large. Find an edge on price or vol and trade around that edge.
 
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