HowardCohodas Index Options Credit Spread Trading Journal

atticus · May 6, 2011

Quote from HowardCohodas:

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.

Save for the hypothetical in which HoCo calculates losers on a 6-figure hypothetical portfolio and winners on the spread's debit requirement. Win-win scenario. The difference between HoCo (other than scale) and Bernie is that HoCo is actually trading something.

HowardCohodas · May 7, 2011

We are missing eudemon, mg, mr and atticus over at What's wrong with Iron Condors.

jb514 · May 7, 2011

Quote from eudaemon:

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!.

Sounds like you think no one can make money unless we cheat.

heech · May 7, 2011

Quote from jb514:

Sounds like you think no one can make money unless we cheat.

How about... it's easy to cheat yourself into thinking your making money with options, because they aren't 50/50 trades the way directional trades are.

Scalpers have thousands of trades and track win %, r/r, edge per trade, etc. Easy to understand the odds in those trades (roughly 50-50) and determine whether you have an edge you should exploit in size. Option traders have a much harder time seeing exactly what risk they're taking, and whether they are actually "winning" or just lucky. If you consistently trade low probability spreads, you really can't tell... Ever?

RichardRimes · May 7, 2011

wow...that was incredibly well put heech...I had never thought about it and you are absolutely right. Having spent a number of years trading options in both the high and low vol environments I now find myself sometimes saying "eh...not worth it"...or "ya know this feels right" and that seems to work just as good as anything

eudaemon · May 8, 2011

Quote from jb514:

Sounds like you think no one can make money unless we cheat.

Sounds like I have studied the subject matter extensively, and you sir, have not.

There is no need to cheat, but there are cheaters operating in the market. It's obvious to anyone that is paying attention. If I detect and understand a cheat and copy his bets, am I cheating?.

Personally I prefer to play blackjack only when I'm getting dealt 21, and depending on the dealer hole card, sometimes I take insurance. I like "certainties" at low controlled risk too, because a bigger cheater may enter the game inmediately after, or a disaster may strike.

jb514 · May 8, 2011

Quote from eudaemon:

Sounds like I have studied the subject matter extensively, and you sir, have not.

There is no need to cheat, but there are cheaters operating in the market. It's obvious to anyone that is paying attention. If I detect and understand a cheat and copy his bets, am I cheating?.

Personally I prefer to play blackjack only when I'm getting dealt 21, and depending on the dealer hole card, sometimes I take insurance. I like "certainties" at low controlled risk too, because a bigger cheater may enter the game inmediately after, or a disaster may strike.

So, at the very least, if credit spreads are out of the question, what should we be trading? If I can recall your posts correctly, it sounds like we shouldn't even get involved in derivatives.

eudaemon · May 9, 2011

Quote from jb514:

So, at the very least, if credit spreads are out of the question, what should we be trading? If I can recall your posts correctly, it sounds like we shouldn't even get involved in derivatives.

If you have a directional edge, credit spreads are a playable instrument, imho. There may be better ways to play your "edge" or maybe not.

Make sure your "edge" is big enough to cover: bid-ask spread, commisions, your salary, and catastrophe insurance.

If you can't quantify somehow your "edge", then you do not have one. It's like the old poker saying: If you do not know who the fool is at the table after 10 minutes, then you are the fool.

sle · May 10, 2011

Quote from heech:
Option traders have a much harder time seeing exactly what risk they're taking, and whether they are actually "winning" or just lucky. If you consistently trade low probability spreads, you really can't tell... Ever?

You have to be anal about maintaining your book and maintaining a variety of record-keeping. Even if you do something stupid like selling low-delta options, you could understand the risk pretty well by looking at a variety of slides and scenarios. One of the things I did not like in this thread is the whole "close your eyes and cover your balls" aspect of the "strategy".

heech · May 10, 2011

Quote from sle:

You have to be anal about maintaining your book and maintaining a variety of record-keeping. Even if you do something stupid like selling low-delta options, you could understand the risk pretty well by looking at a variety of slides and scenarios. One of the things I did not like in this thread is the whole "close your eyes and cover your balls" aspect of the "strategy".

I don't want to beat this topic into the ground... but when you talk about "understanding the risk", my opinion is how to determine whether you really *do* understand the risk. How do you measure your own level of knowledge, and just as importantly, ability to execute correctly? It's gotta be more than the ability to write a book, entertain a cocktail party, or hold forth convincingly on an internet forum.

Maybe its because of my background as an engineer, but my opinion is... if you can't quantify it, if it's not statistically significant, then it's just noise.

Let's say you understand perfectly that you're trading a position that has a 90% chance of winning and 10% chance of losing... now, how can you tell whether its fairly priced? If you're selling it, you are taking a view that those options are overpriced. Are you right? How do you *determine* if your decisions are right...? Just based on whether that position made money at the end of the month? At the end of the year? At the end of the decade? How can you prove/disprove the alternative hypothesis that those options you sold were actually under-priced (in God's eye)... but you just got "lucky"?

My bottom line is: anyone selling low-probability spreads can't possibly evaluate their own skill. Think about the problem in that light, and I think you'll see what I mean. I'm not claiming that they don't have any skill, I'm just saying it's a complete unknowable without decades (centuries?) of trading results... rather than following their advice, I might as well goto Vegas (the odds there are at least well known).

If you believe you have the ability to determine when the market is over-pricing options... then convince me (and yourself) by taking positions that are 50/50 bets, or 66/33 bets. It won't take too many trades (a few hundred?) before I can even begin to guess whether you're actually beating the markets.