HowardCohodas Index Options Credit Spread Trading Journal

HowardCohodas · Apr 30, 2011

Rodney King · May 3, 2011

Quote from HowardCohodas:

refer to trading credit spreads as selling cheap gamma. Why the emphasis on gamma rather than theta?

Gamma and theta are the same thing, like matter and energy. See for instance the explanation on Dr Niederhoffer's site, http://bit.ly/j5nr1f

Magic8 · May 3, 2011

Quote from thoreau777:

I agree Howard has been lucky. I do not smell insincerity in his posts, and so I do believe that he believes in his dashboard. But this method of selling cheap gamma has been tried before, and shown that there is really no positive expected outcome over the long course of events. I believe this strategy is the most dangerous of them all because it builds a false integrity into the prefrontal lobe of cerebral cortex. The area that is in charge of judgment is bewildered with a constant seemingly predictable series of wins. This reminds me of a Bugs Bunny and Road Runner cartoon I witnessed years ago where the Coyote runs along a conveyer belt chasing the Road Runner while a large hammer strikes at the targets in simple harmonic motion. Most of the time the Coyote was fine, and continued to chase after what he so desired. But the cartoon as did the others in kind, always ended with the same horrific results for the Coyote. He never learned... but at least millions of little children gained some humor over the incident.

But can I and other experienced traders merely sit back and watch with amusement as ridiculous sites like monthlycashflowthroughoptions.com and others peddle easy and safe returns through selling DOTM options where the risk reward is 20 to 1? I cannot because this game is not a cartoon. Please be very careful with this strategy. I believe Howard is trying in his heart to help others and I feel he is an affable fellow. But his trading history I feel is far too short. I have been in the premium selling business for a far longer period of time. Can you make money? Yes. But can you keep it over a long period of time? It is like playing Russian Roulette albeit with a much larger number of empty chambers. As you survive as you hear the blank click against your temple, you may feel that tomorrow will never come. But you will be wrong, and will eventually get a headache that allow your brain to breathe...

That tired old russian roulette analogy again.

http://www.monthlycashthruoptions.com/ReturnOnInvestment.htm

How can you argue with their results? You can't.

Think they're liars? Probably not. Even if they showed you their long form birth certificates (along with all their brokerage statements)... still wouldn't be enough to convince you guys.

No trading strategy out there, none, zip, zero, has positive expected outcome, over the long term; except buy and hold - decades.

Credit spreads work great in these types of market conditions... goal is to make your money, then get the hell out.

heech · May 3, 2011

Quote from Magic8:

That tired old russian roulette analogy again.

http://www.monthlycashthruoptions.com/ReturnOnInvestment.htm

How can you argue with their results? You can't.

Think they're liars? Probably not. Even if they showed you their long form birth certificates (along with all their brokerage statements)... still wouldn't be enough to convince you guys.

No trading strategy out there, none, zip, zero, has positive expected outcome, over the long term; except buy and hold - decades.

Credit spreads work great in these types of market conditions... goal is to make your money, then get the hell out.

Looking at their returns with a closer eye... and you'll see they're doing exactly that: playing Russian Roulette. For god's sake, they some how managed to lose 33% in March 2010 on a "relent-less 20 day up trend".

You'll also note that they ended up "flat" in both April and May 2010. That caught my eye, since we had a huge bear + flash crash during that time period. If you read the description, you realize their ROI numbers are not real... they are only on the basis of *closed* trades. They simply didn't close any of their positions in May (not officially); they instead rolled their ATM bear put spreads into June at "no cost". And while doing this, they showed a zero loss for the month. Now that's risk management for you.

They then give a long-winded explanation for how wise they were for knowing that May 2010 would be the bottom, and that equities would bounce back by June. What really happened is that they went double for nothing, and got lucky.

Those guys are destined for blow-up... but they'll do it quietly, just like hundreds of others before them. One of these days, the website simply won't be updated any more.

traderlux · May 3, 2011

Quote from Rodney King:

Gamma and theta are the same thing, like matter and energy. See for instance the explanation on Dr Niederhoffer's site, http://bit.ly/j5nr1f

....ok, just like in high school, who's faster, john's ford or lou's chevy....

HowardCohodas · May 4, 2011

Quote from Rodney King:

Gamma and theta are the same thing, like matter and energy. See for instance the explanation on Dr Niederhoffer's site, http://bit.ly/j5nr1f

Matter and energy are related precisely by an equation. Gamma and Theta have an approximate relationship per your reference.

Even if they were precisely related as are matter and energy one prefers to talk energy in some circumstances and mass is others. Momentum (m*v) is easier to understand when thinking mass than energy. It is not just a difference in units, it is a difference in frames of reference.

I'm sure that there are some who prefer speed measurement in units of furlongs per fortnight. At least, unlike mass and energy, they are in the same frame of reference. It just makes things harder to understand for those of us who use milers/hr on a daily basis.

So, back to my question. Why the preference for gamma over theta when discussing the risks associated with credit spreads?

HowardCohodas · May 4, 2011

Those that contend that trading credit spreads must eventually blow up may be correct. I just have not seen an explanation of this contention that I can understand. In fact, most just state it as though it were so obvious that anyone can see it without proof. I'm just not one of those so gifted.

If I grant the premise for a moment then the question remains, is this Russian Roulette (1 in 6) odds or living in San Francisco odds. Few play Russian Roulette on purpose knowing the odds. Many live in San Francisco knowing the odds.

eudaemon · May 4, 2011

Quote from HowardCohodas:

Those that contend that trading credit spreads must eventually blow up may be correct.

It can be proved mathematically based on historical data of market behaviour going back hundreds of years, in any timeframe (intraday timeframes to monthlies) I may add.

Therefore the emphatic arrogance of those making the affirmations, some of whom have actually proven it mathematically to themselves and others.:eek:

HowardCohodas · May 4, 2011

Quote from eudaemon:

It can be proved mathematically based on historical data of market behaviour going back hundreds of years, in any timeframe (intraday timeframes to monthlies) I may add.

Therefore the emphatic arrogance of those making the affirmations, some of whom have actually proven it mathematically to themselves and others.:eek:

Point me to a resource for such a proof.

eudaemon · May 4, 2011

Quote from HowardCohodas:

Point me to a resource for such a proof.

I haven't published my proof and do not intend to. You can prove it to yourself in a couple of days with some knowledge of statistics and probability, although several PhD's have almost kissed my hand in the past for showing it to them.