HowardCohodas Index Options Credit Spread Trading Journal

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I think you're overstating it, eudaemon. Statistically speaking, there's next to nothing that we can state with certainty. The notion that credit spreads "must" blow up, Howard is correct, is not correct. There's no 100% certainty.

I think the difference here is 1) between living in San Francisco, and 2) selling earthquake insurance to San Franciscans. Millions of people live in the San Francisco region, but precisely zero (none!) corporations believe it's good business practice to sell generic earthquake insurance to San Franciscans.

The only exception is a government-funded/structured organization, the California Earthquake Authority. And they do this in order to provide a public good, not because there's any profit in it.
 
Quote from heech:

I think you're overstating it, eudaemon. Statistically speaking, there's next to nothing that we can state with certainty. The notion that credit spreads "must" blow up, Howard is correct, is not correct. There's no 100% certainty.

I think the difference here is 1) between living in San Francisco, and 2) selling earthquake insurance to San Franciscans. Millions of people live in the San Francisco region, but precisely zero (none!) corporations believe it's good business practice to sell generic earthquake insurance to San Franciscans.

The only exception is a government-funded/structured organization, the California Earthquake Authority. And they do this in order to provide a public good, not because there's any profit in it.
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It can be proven mathematically that selling credit spreads randomly without a positive directional edge of sufficient magnitude that such edge overcomes the bid-ask spread plus commisions, using a finite capital account is a losing strategy with 100% certainty of losing money if done during a long enough time interval and that it has a negative expectation 100% of the time.

It can also be proven that trading such spreads with 0% costs is also a losing strategy if using a finite capital account.

So your edge must overcome: bid-ask, commisions, and a few other things that shall remain, for now, unnamed.:eek:

It's somewhat like playing roulette betting on all numbers, except 0, with the additional rule that if the ball goes off the wheel and falls to the floor then someone will spray bullets with a machine gun over the players at the table.

A very beatable game still.:D

hint: the guy with the machine gun never loses.:D
 
Quote from eudaemon:

It can be proven mathematically that selling credit spreads randomly without a positive directional edge of sufficient magnitude that such edge overcomes the bid-ask spread plus commisions, using a finite capital account is a losing strategy with 100% certainty of losing money if done during a long enough time interval and that it has a negative expectation 100% of the time.
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Oh, it certainly has a negative expectation. But even if you have a normally distributed random variable with a hugely negative expectation, that does not mean a non-zero possibility that it can be positive.

It's perfectly possible that I'll flip a coin heads up 1 billion times in a row.
 
Quote from heech:

Oh, it certainly has a negative expectation. But even if you have a normally distributed random variable with a hugely negative expectation, that does not mean a non-zero possibility that it can be positive.

It's perfectly possible that I'll flip a coin heads up 1 billion times in a row.
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Sure. None of the dinosaurs bought meteorite insurance, but a few survived for a while after the ELE. Some animals are just lucky, and lucky beats good most of the time. Now if you are both lucky and good, that's unbeatable, but you'll still die, so better quit while ahead.:p

I personally met a guy in LV that made more than $2 million playing blackjack using basic strategy and martingaling. Then he lost it all and made the headlines again...People win the lotto all the time...etc.
 
Wow!
As an amateur you make me feel very small arguing about probabilities and statistics and so forth. I´m just dumb old boat builder and lobster fisherman, who got lucky in real estate during the boom.
Wish I could get rich like you guys must be! :)
 
Quote from eudaemon:

Sure. None of the dinosaurs bought meteorite insurance, but a few survived for a while after the ELE. Some animals are just lucky, and lucky beats good most of the time. Now if you are both lucky and good, that's unbeatable, but you'll still die, so better quit while ahead.:p

I personally met a guy in LV that made more than $2 million playing blackjack using basic strategy and martingaling. Then he lost it all and made the headlines again...People win the lotto all the time...etc.
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http://en.wikipedia.org/wiki/Infinite_monkey_theorem

look up Tim Sykes on this board, some funny shite in there.:p
 
Quote from falconview:

Wow!
As an amateur you make me feel very small arguing about probabilities and statistics and so forth. I´m just dumb old boat builder and lobster fisherman, who got lucky in real estate during the boom.
Wish I could get rich like you guys must be! :)
More...

Never indulge in self-pity. Some of the smart people you meet around, including yours truly have been broke more than once, and it's never easy making money trading, no matter how smart you think you are.

It's much easier to live the high life being a con man like Madoff...or a politician...
 
There is no edge in anything I posted, but it'll diminish the negative edge most have, and may give you a different way to look at the game, which statistically is not a normal fixed odds game.

Like gravity pulls you down when you jump out of a window, whether you know about gravity or not, a negative edge will destroy your account whether you know how negative it is or not!.

Most...let's call them, people that think they have an edge, have not taken into account the cost of hedging tail risk...it's like running a business without fire insurance, without cash reserves...

When you take into account disaster insurance, most everything that you can come up with and or read everywhere is basically a negative expectation game. Better quit while ahead!.

If you think it doesn't happen, look at a silver chart, it happened Monday and Tuesday to ***most*** traders in that market. I'm also certain that the guy with the machine gun (the guys that knew the rules were to be changed) made out like bandits with very little risk.

That Soros character was out of all metal longs by the end of April. Coincidence?. YEAH RIGHT!.
 
Some things that come to mind concerning credit spread trading:

A. Markets do tend to range more than they trend, which seems to favor a market neutral strategy.

B. When markets sell-off sharply, they tend to recover very quickly. This is probably why many writing fund like LJM double down (rolling over in this case) after a steep drop.

A huge difference between option selling and buying is that the seller is at risk of experiencing a large DD from day one. Another 9/11 could happen the day after the first put is written and the fund starts down at 30%.

Another concern is liquidity. The SP call market is much more liquid than the put market.
 
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