Quote from jkgraham:
Howard,
I have been looking at your journal and have some questions and comments.
Entry Points:
If entering at 60 days gives you more opportunity for rolling winning spreads, does it at the same time introduce the risk of having more losing spreads?
I trade 60 days out for several reasons.
- Risk allocation over multiple time frames.
- More opportunities for roll. A roll implies exiting a spread and entering another on the same side in the same series. Exiting the spread freezes the return. Entering the new spread is no more risky than any other entry provided the same entry rules apply.
- 30 to 60 trading days left until expiration is generally thought of as optimum time to enter a spread to take advantage of time decay. There are also good arguments that nearer the expiration is optimum. This used to be my primary reason, however after several instances of rapid market movements, I find this less compelling than risk allocation in series with different time to expiration.
Quote from jkgraham:
Do you start with more PUTs spreads than CALLs when the market is trending up and vice-versa when it�s trending down. If so, is it intentional or just a side effect of following the entry point rules.
If the companion spread meets my rules I enter it with the same number of contracts. I used to say that I wanted to be delta neutral as I am not good at predicting market direction. I now understand that delta neutral is in fact a bias on the market going sideways. Here I am with the probabilities as the market moves sideways about 80% of the time.
Quote from jkgraham:
Spread Management:
What happened in the down month? In hind-sight, what could you have done different; aside from the obvious of not entering the losing spread where you did?
My main fault is stretching my rules to accept more PoT to get the companion spread at my price. I no longer "stretch" on PoT and just pass if the credit I desire is not available. This gives me a market bias, but is the same one the options spread prices are giving me. I am now paying more attention to this.
Quote from jkgraham:
Did volatility increase during the down month? If so by how much?
Sometimes. I use VIX as my proxy as well at the IV of the option series.
Quote from jkgraham:
Have you ever considered buying back the Short-Option on a losing spread and letting the Long-Option possibly gain value if the market continues to move in the same direction?
Yes I have, but have not yet done so. I am still analyzing this "opportunity" to understand how best to manage it. This would have saved my bacon a couple of times, but I'm not confident enough to add it to my repertoire.
Quote from jkgraham:
Have you considered rolling losers instead of just closing them?
If there is a spread that fits my rules, I do just that.
Quote from jkgraham:
Deciding when and where to close losers seems a little bit like deciding where to put a trailing stop order on a stock. Close too early and the market could turn around and go back the other way and now you just closed an eventual winner. Close too late and lose more money.
I used some back testing and some analysis to inform my rules. I bail at 20% loss of capital at risk.
Quote from jkgraham:
How much �outside� information do you take into consideration: current events, market trends, support and resistance, etc. or would looking at that allow more emotion to affect your decisions?
It is my contention that all the information I need is in the PoT and credit available for a spread at that level. When I let emotions move me to go outside my tested limits, it has hurt me. I cannot deny what is in my trading journal.
Quote from jkgraham:
The Dashboard:
Did you develop the Dashboard yourself?
The dashboard comes out of a class I taught using airplane instrument panel design considerations and the requirements to manage situations under severe stress. Out of this class came the idea of a book I am still working on titled "All I Know About Options, I Learned in Flight School." The lesson for this point is "being a pilot is hours of boredom punctuated my moments of panic." It's the panic tools that help you too succeed.
The images you see are provided by an application I wrote on my server (PHP with MySQL). It is a prettier version of my Excel version. The Excel version is hot linked to my ToS desktop platform so it has up to the second results. The web application was written to do the same thing for me when I am away from my desk, however ToS has suspended API links to their system for retail customers. I'm working on a solution, but it is not my highest priority.
Quote from jkgraham:
Where I�m at:
I am pushing myself to learn as much as I can about options. I feel like I know what the pieces of the vehicle are, but I don�t know how to put them together or how to drive it once it�s built. The strategy that I plan to master first is credit spreads -> Iron Condors. I will be attending a workshop on May 13-15 which uses Iron Condors as the first strategy that they teach.
Whose class are you attending. You may wish to PM me so I can point out what may be problematic with respect to my methods.
Quote from jkgraham:
In the beginning of my options experience I dabbled with selling Covered Calls and then moved on to selling Naked Puts as a method of buying and selling stocks that I wanted to �trade�. But I now want to do more risk management. I already know that just because a broker tells me that I have more cash or margin available to buy more spreads not to bite off more than I can lose in one month. Once you find a system that works 80-90% of the time I assume that is hard not to. But an investor has got to set rules and stick to them.
Don't forget that winning rates of 80% to 90% generally have a poor risk/reward profile. In practice this means that you will have many months of nice profit, and a setback that may set you back from 2 to 6 months. That still leaves you with an enviable yearly return, however you must properly prepare to survive these events both financially and emotionally.
