So I don't use stops and I think the math supports this.

[earth_imperator]

Nope max reward about 3 and max risk is 4 with expiry at 10 or lower.
Using your example above with price at 10 get long the 8 put and short the 7 put for 0.3 debit.
Max risk is 0.3 max reward is 1 (7 or lower at expiry) That gives you your 1:3 risk/reward approximately.
All figures are for illustrated purpose only.

I disagree. IMO both constructs don't have a risk:reward of 1:3.
But why do you believe the risk is 4?

Some weeks ago I was going to find the correct formula for this, but was held back or distracted by other (un)important stuff...
Was going to calc it by using the probability-weighted payoff curve, but unfinished yet...

 

[deaddog]

I really don't have the patience to actually test it before implementing it.

Everyone wants to be a successful trader.
No one wants to do the work!!

Have you guys been drinking the smb capital cool-aid or what? Stops are an amateur way of trading. They will not protect you from a huge drawdown...even when the market is open you aren't guarantied getting filled at your stop price anyway. Placing a stop does not equal defined risk...max loss is your defined risk.

I don't see where I mentioned stops, only that you haven't spent the time to test your theory.
But thanks for answering a question I didn't ask.
Good luck with your trading.

 

[MarkBrown]

i "know" it's best not to use stops but you better have a backup plan and "know" it is statistically sound.

 

[tooriginal]

To the extent that the thing your trading is a martingale, that is, the fair value in the future is the value now, there is a theorem that says there is no optimal stopping strategy.

https://en.wikipedia.org/wiki/Optional_stopping_theorem

But if you know the fair value in the future is away from the present value, then stops can improve pnl.

 

[ironchef]

To the extent that the thing your trading is a martingale, that is, the fair value in the future is the value now, there is a theorem that says there is no optimal stopping strategy.

https://en.wikipedia.org/wiki/Optional_stopping_theorem

But if you know the fair value in the future is away from the present value, then stops can improve pnl.

Thank you for the link.

I read it but don't quite understand. Question: is fair value the expected value?

 

[taowave]

You guys are WAY overcomplicating this...Hes trading spreads with defined risks,looking at a 1:3 risk reward ratio....

Im not saying stops wouldnt enhance his return,but there is nothing wrong with trading limited risk positions as a punt

His real problem is hes too lazy too backtest,which doesnt bode well for his future

 

[wxytrader]

T

You guys are WAY overcomplicating this...Hes trading spreads with defined risks,looking at a 1:3 risk reward ratio....

Im not saying stops wouldnt enhance his return,but there is nothing wrong with trading limited risk positions as a punt

His real problem is hes too lazy too backtest,which doesnt bode well for his future

Technically I am back-testing because I have sized way down. Currently after some mis-management I am down 640 USD last week. Had I exited during the volatility spike, I would have been up 250 USD. Had I not tinkered with it by adding a credit spread in the other direction then I would only be down my max risk of $160 or whatever. Had I closed the credit spread 10 minutes after opening it I would have profited about $100 on it, instead I suffered a max loss. I am beginning to notice with credit spreads they will hit 12 deltas almost 100% of the time on the call and put side...so forget about iron condors being a viable strategy for anything other than cash settled options imo.

So in summary I could have made a maximum of 350 USD, but instead I suffered a maximum loss of 640 USD.

Had I done nothing like I planned I would have suffered only a $160 loss. I also don't close positions itm or otm to avoid fees. It usually works out cheaper to let them expire worthless. So again, doing NOTHING is the best strategy thus far. Ideally I will set up profit taking conditional orders based on the underlying price...that way I can really do NOTHING. As it is I am sitting there making decisions intraday which is the trading equivalent of watching the 3 stooges do a slapstick routine...

Side note: So from the anlayzer tool and my spreadsheets, ITM spreads, with the same underlying price seem return increasing profits the closer they get to expiration?

 

[taowave]

Before you get too crazy with debot spead vs credit spread,are you familair with " box arbitrage"??

T


Technically I am back-testing because I have sized way down. Currently after some mis-management I am down 640 USD last week. Had I exited during the volatility spike, I would have been up 250 USD. Had I not tinkered with it by adding a credit spread in the other direction then I would only be down my max risk of $160 or whatever. Had I closed the credit spread 10 minutes after opening it I would have profited about $100 on it, instead I suffered a max loss. I am beginning to notice with credit spreads they will hit 12 deltas almost 100% of the time on the call and put side...so forget about iron condors being a viable strategy for anything other than cash settled options imo.

So in summary I could have made a maximum of 350 USD, but instead I suffered a maximum loss of 640 USD.

Had I done nothing like I planned I would have suffered only a $160 loss. I also don't close positions itm or otm to avoid fees. It usually works out cheaper to let them expire worthless. So again, doing NOTHING is the best strategy thus far. Ideally I will set up profit taking conditional orders based on the underlying price...that way I can really do NOTHING. As it is I am sitting there making decisions intraday which is the trading equivalent of watching Larry, Curly, and Mo do a slapstick routine...

Side note: So from the anlayzer tool and my spreadsheets, ITM spreads, with the same underlying price seem return increasing profits the closer they get to expiration?

 

[wxytrader]

Before you get too crazy with debot spead vs credit spread,are you familair with " box arbitrage"??

I'll look into it. I don't think my broker allows boxing options strategies if thats the same.

• The profit earned is really very low and minimal.
• The strategy is only helpful for experienced investors and not retail investors, where a lot of knowledge is required to take such a call.
• The margin required to apply this strategy requires a huge margin and maintenance of it which small traders will find it tough to maintain.

This wouldn't work for me. I would prefer lose big to win big versus lose small to win small.

 

[cesfx]

I am beginning to notice with credit spreads they will hit 12 deltas almost 100% of the time on the call and put side...

12 delta