Problems with McMillan's Method

S

ScottDamashek

I'm new to doing straddles and I'm following Larry McMillan's method but I'm running into problems. If you are not familiar with Larry's method, basically he compiles information on various straddles and runs a monte carlo simulator to determine which straddles have the best probablility of ever touching either breakeven point. Here's the problems:

1. These are good plays on a mathematical basis, but often they have very low volume and wide price spreads. Though Larry does base his research on the ask price, he does not factor in how much you will have to give up to exit the straddle. Often, I have to give up the entire premium to get out of the position. The result is, in order to make money, I have to be much further in the money then Larry actually predicts.

2. Larry calculates his probabilities based on a 1 call - to - 1 put basis. If you want to make the straddle delta neutral, the cost of the straddle is usually going to be much higher and the probabilities McMillan calculated will be invalid because the breakeven range is now significantly wider.

Has anyone else run into problems like this with Larry's method? Does anyone have any advice?

Thanks
 
Before you emulate someone's method, make sure it works. Call that person up and ask him for his trading records sequentially not cherry-picked. Show me the money !!
 
I've read that Larry's own fund makes maybe 20 something %. That's good, but not great and he's the master. I don't really believe that using higher math is going to get you too much more in the options market for swing or LT trading.

I think the key to making money in the options market in the swing/LT time frame is to be able to pick direction (or at least future volatility) well. If you can do that, you should be sitting pretty. If you can't, I just think all the higher math arb stuff is already sucked out of the market. JMHO :) .
 
Quote from ScottDamashek:
...If you want to make the straddle delta neutral, the cost of the straddle is usually going to be much higher and the probabilities McMillan calculated will be invalid because the breakeven range is now significantly wider...[/B]
More...
A delta neutral position as you describe is no longer just a straddle or strangle (might be something like a straddle/strangle plus one or more straight puts - depends on how symmetrical it is and how close to the current underlying price). So it's not the same position and you really can't compare them.

The reasons you might do a straddle OR go delta neutral aren't the same. You can't just arbitrarily combine them and expect good results.
 
Quote from ScottDamashek:

I'm new to doing straddles and I'm following Larry McMillan's method but I'm running into problems. If you are not familiar with Larry's method, basically he compiles information on various straddles and runs a monte carlo simulator to determine which straddles have the best probablility of ever touching either breakeven point. Here's the problems:

1. These are good plays on a mathematical basis, but often they have very low volume and wide price spreads. Though Larry does base his research on the ask price, he does not factor in how much you will have to give up to exit the straddle. Often, I have to give up the entire premium to get out of the position. The result is, in order to make money, I have to be much further in the money then Larry actually predicts.

2. Larry calculates his probabilities based on a 1 call - to - 1 put basis. If you want to make the straddle delta neutral, the cost of the straddle is usually going to be much higher and the probabilities McMillan calculated will be invalid because the breakeven range is now significantly wider.

Has anyone else run into problems like this with Larry's method? Does anyone have any advice?

Thanks
More...

You are now entering the reality zone ...
 
You must log in or register to reply here.
Back
Top