HowardCohodas Index Options Credit Spread Trading Journal

[RichardRimes]

Quote from HowardCohodas:

Thank you for the civil tone. I truly appreciate it.


As a student of pedagogy, I believe I can teach my management methods. At least two people I know adequately managed the blip at the end of Feb using the same methods that would be appropriate for a black swan event.

OMG you can NOT be serious....trying to equate a TINY blip with a severe and catastrophic event and saying the same method would be appropriate????.... NOT A CHANCE IN HELL...

management of trade is constantly evolving and dynamic...there is NO method that will work for each and every person each and every time.

 

[HowardCohodas]

In the days when I started learning about options, I found these videos helpful. Perhaps you will as well. Dean Mouscher's masteroptions.com

View the bottom one first.

 

[rew]

Quote from trefoil:

I've been thinking and thinking about this, and I don't think you get the point: what you're saying is kind of impossible. The number of outliers, let's call them, varies wildly over time. You would have had lots in the 72-74 bear, which was actually a peak from a series that started back in the mid-sixties, then suddenly for a long time only a very few. Starting in August 1982 lots of up action that would have killed you on the call side. Then nice and trending, mostly. Then in 1987, lots again. Then again in 1989 (United Air mini-crash) 1990 (Iraq invades Kuwait) then in the late nineties they start coming one after the other (the Tequila Mexican peso crisis, the Asian currency crisis, the Russian default and LTCM, and then the dot com bust), then a period of calm where the VIX practically goes to single digits, and then in 2007 the crisis starts (the VIX shot way up at the end of Feb, which looking back is when the fun started) and you continue with that until the spring of 2009, when, by the way, you would have gotten murdered on the call rather than the put side of your IC's.
The variation of these over a long period of market history is pretty severe. We're in a period of relative calm now. (and guess what? We've got someone boasting about his credit spread returns.) For how long? No one knows. Let's just say that the frequency and the severity of discontinuities is itself discontinuous. Therein lies the problem.

I don't think *you* get the point. It is entirely reasonable to say that trading iron condors requires being able to estimate the probability of hitting the short strikes, and to say that no such method of estimating probabilities will work in the real world, and thus that trading iron condors is not a wise strategy. But that's not what you said originally. You said that trading iron condors requires using Black Scholes, which is nonsense.

 

[atticus]

Quote from HowardCohodas:

In the days when I started learning about options, I found these videos helpful. Perhaps you will as well. Dean Mouscher's masteroptions.comk

View the bottom one first.

RichardRimes will forget more about options than you will ever know.

 

[El OchoCinco]

Quote from Magic8:

First, we know that credit spread strategies can work, year after year, if managed well - just like any other strategies. Even in 2008. See my earlier post.

Second, I'm not so sure Howard is here necessarily to "sell himself" to others vs. more he's just sharing his trading approach. Just like OptionsCoach, Phil. And Phil actually had something to sell - a book. But I never got the drift that he was out hawking/praying on people. I don't think Howard is either.

Third... fine. Screw credit spreads. Let's hear ideas on how to generate the equivalent 3% to 5% per month, annualized. So instead of attacking Howard and his strategy - offer something else. Other ideas. So that all can see what the other possible alternatives are.

Any strategy can truly work if managed correctly and the main point is that there is no real trick to these credit spreads since they are fixed trades with little or no adjustment scenerios.

Manage the losers and hope you can manage the real bad events well enough to still have capital left. I took a hit in August 2007 but was not that big of a hit since things were getting real scary right away and I started to bail and stayed out of spreads since then as vols were too crazy and I also found a better way to play non-directional trades for bigger profit and better risk management (i.e. risk alluded to them earlier).

I always say this strategy is for the experienced trader to figure out how to work into their own portfolio but is a dangerous one to teach and is not the best R:R trade possible. It works great in lower vol environments but should never be looked at as an automatic month to month strat without considering macro events.

And to be fair, even in my thread I made it clear the book did not discuss these trades at all (there are no real adjustments to be taught so was not worth writing about).

Expertise in a strat comes from trading not backtesting.

 

[El OchoCinco]

Quote from HowardCohodas:


As a student of pedagogy, I believe I can teach my management methods. At least two people I know adequately managed the blip at the end of Feb using the same methods that would be appropriate for a black swan event.

Best advise I can give you is just focus on trading and learning how to handle this strategy as it will keep you busy enough. There is no real money in teaching/mentoring and it just distracts you from the more important aspects of trading. Every time I mentored or coached or taught one on one for a period of time I always realized it is not worth it in the end. Students are gonna trade their own way no matter what you tell them and with a strategy with such tremendous risks and ease of abuse, it almost makes it dangerous to teach it to beginners.

The best example of this point is that the brightest minds I have been lucky to come across in option trading (Charles Cottle, Natenberg, etc..) never teach such a strategy as they have found far better R:R means to play volatility and neutrality or direction which is what a credit spread or IC is playing.

Your trading will improve dramatically when you start looking at butterflies and short straddles with appropriately timed entries and purchase of wings/underlying futures and managing it that way.

 

[El OchoCinco]

Quote from Magic8:


Third... fine. Screw credit spreads. Let's hear ideas on how to generate the equivalent 3% to 5% per month, annualized. So instead of attacking Howard and his strategy - offer something else. Other ideas. So that all can see what the other possible alternatives are.

The biggest mistake is to look for holy grail strats that supposedly return fixes 3-5% annualized. Everyone who sells a system always uses these kind of stats but no strategy is fixed in such a way that it always applies perfectly each month for fixed returns. Market situations and volatility change so much that I might sit out a week or two or load up another but I rarely go in automatically on fixed dates with a strat as though it could kick out fixed returns.

As for other possible alternatives, there are over 36 different option strats out there, including credit spreads and ICs and the point is not the strategy but the belief in a fixed income system without appreciation the nuances of the risk/reward profile. If anyone offers you a strategy with a fixed profit profile month in and out then run.

Good traders make money when the right opportunity presents itself and that usually is not month in and month out at fixed intervals.

 

[HowardCohodas]

Quote from optioncoach:

Any strategy can truly work if managed correctly and the main point is that there is no real trick to these credit spreads since they are fixed trades with little or no adjustment scenerios.

Manage the losers and hope you can manage the real bad events well enough to still have capital left. I took a hit in August 2007 but was not that big of a hit since things were getting real scary right away and I started to bail and stayed out of spreads since then as vols were too crazy and I also found a better way to play non-directional trades for bigger profit and better risk management (i.e. risk alluded to them earlier).

I always say this strategy is for the experienced trader to figure out how to work into their own portfolio but is a dangerous one to teach and is not the best R:R trade possible. It works great in lower vol environments but should never be looked at as an automatic month to month strat without considering macro events.

And to be fair, even in my thread I made it clear the book did not discuss these trades at all (there are no real adjustments to be taught so was not worth writing about).

Expertise in a strat comes from trading not backtesting.

We are in violent agreement.

Back testing is just the first stage of a four stage process of qualifying a strategy for serious money. True expertise only comes from serious money trading because all the elements of a trading system are in play; the strategy and the trader. A good strategy traded by an unfocused and undisciplined trader will still lose money.

Can it be taught? I think so. I have taught it to some family and friends. Some are successful at it. Was that do to my teaching? I don't know.

Risk management methods must take into account black swan events. Otherwise it is like the man who fell from the 10th story of the hotel. Passing the third floor he was asked how it was going. He responded "So far, so good." Have I engineered a soft landing that is survivable? I think so. But the market has not tested it yet.

In one 60 day series I collected 8 credits by rolling both the CALL spreads and the PUT spreads when they reached 80+ of their potential return. My total return for that one series was 63.8%. I suspect that by "opportunities to manage", you were talking not of the opportunity side of credit spread management, but rather than the jeopardy side. On the jeopardy I have found no approach worth teaching other than bailing out if the capital at risk loss exceeds 20%. It is a crude instrument in a chaotic environment. Few are able to finesse it.

During periods of rapidly changing volatility, spreads meeting my entry criteria are sometimes not available. Here the management strategy is avoidance.

 

[HowardCohodas]

Quote from optioncoach:

Best advise I can give you is just focus on trading and learning how to handle this strategy as it will keep you busy enough. There is no real money in teaching/mentoring and it just distracts you from the more important aspects of trading. Every time I mentored or coached or taught one on one for a period of time I always realized it is not worth it in the end. Students are gonna trade their own way no matter what you tell them and with a strategy with such tremendous risks and ease of abuse, it almost makes it dangerous to teach it to beginners.

The best example of this point is that the brightest minds I have been lucky to come across in option trading (Charles Cottle, Natenberg, etc..) never teach such a strategy as they have found far better R:R means to play volatility and neutrality or direction which is what a credit spread or IC is playing.

Your trading will improve dramatically when you start looking at butterflies and short straddles with appropriately timed entries and purchase of wings/underlying futures and managing it that way.

Not only is there no money in teaching, but my pricing almost guarantees I will lose money? Not a wise business plan. However, if my goal is to return some of my blessings, then it works for me. Some have said that if I felt that way, I should give it away for free. If there is anyone here who doesn't understand why that is not wise, just ask. But don't expect to be successful in business. Or perhaps even trading.

Am I doing a disservous to my students. I think I have organized things to minimize that including giving them continuous access to my trading Dashboard (Instrument Panel) to watch me trade. What I post here is just the occasional snap shot.

I have, indeed, been working with some of the strategies you mentioned. The trick is not just to be successful at it, but to reduce it to its essence so that it can be taught to experienced traders who do not immerse themselves in options. I also worry about teaching something that cannot be understood in closed form and may mislead students into false confidence. I cannot prevent irrational exuberance, but I don't want to push them into it by over simplifying.

 

[HowardCohodas]

Quote from optioncoach:

The biggest mistake is to look for holy grail strats that supposedly return fixes 3-5% annualized. Everyone who sells a system always uses these kind of stats but no strategy is fixed in such a way that it always applies perfectly each month for fixed returns. Market situations and volatility change so much that I might sit out a week or two or load up another but I rarely go in automatically on fixed dates with a strat as though it could kick out fixed returns.

As for other possible alternatives, there are over 36 different option strats out there, including credit spreads and ICs and the point is not the strategy but the belief in a fixed income system without appreciation the nuances of the risk/reward profile. If anyone offers you a strategy with a fixed profit profile month in and out then run.

Good traders make money when the right opportunity presents itself and that usually is not month in and month out at fixed intervals.

Again we are in violent agreement.

You just stated the case more elegantly than I have.

My entry rules will not always find spreads to enter, even when it is their time of the month. I don't believe any strategy that is not capable of determining when the markets are not conducive to using them is not a competent strategy.