SPX Credit Spread Trader

[yip1997]

Quote from dagnyt:

Let's say you have 100k and decide that 10k is all you care to devote to the DD startegy. If you earn 1k for the month, you may not think is method is very productive because you only earned 1%. OTOH, I would say that the method worked well and returned 10%.

Mark

Mark,

I agree with you on the statement here. If I have decided to devote 10K for DD, I might not use all 10K for one position at the same time. I might risk 5K initially, and wait for another better opportunity for the remaining 5K because of my market outlook. If It turns out that my remaining 5K is sitting there because the opportunity never comes, should I or you consider the remaining 5K as the working capital too? Since waiting is part of a trading game, and it is the waiting (yourself and your capital) and your patience that earn the profit.

In some of the hedge fund or CTA selling premium, they only risk less than 20% of the capital, and the remaining 80% sitting there. They consider the return using 100% of the capital instead of 20%. Why? It is the reserve money (the remaining 80%) that survive them during a big drawdown.

 

[domestic]

Quote from rallymode:

I think mav has consistently mentioned that he is a short gamma trader. That encompasses quite a few methods and/or styles. I doubt he uses any one method in isolation.

maybe i was not clear in my parentheses. i was not suggesting he trades one style and then wondering what it was.

if he has mentioned that he tends to be a short gamma trader, i missed it. i would then (as others must be) interested in a brief thought or two on he trades short gamma. how could anyone not be curious?
mav and mo are not remiss in their warnings about cheap gamma, i am clear on that. i just think a warning is great; but adding , "this is one way i might do this" is even better.

 

[yip1997]

Quote from rallymode:

I think mav has consistently mentioned that he is a short gamma trader. That encompasses quite a few methods and/or styles. I doubt he uses any one method in isolation.

RM,

If my memory is still functioning properly, mav is not a short gamma trader. On average, he longs more gamma than short.

 

[yip1997]

Quote from domestic:

maybe i was not clear in my parentheses. i was not suggesting he trades one style and then wondering what it was.

if he has mentioned that he tends to be a short gamma trader, i missed it. i would then (as others must be) interested in a brief thought or two on he trades short gamma. how could anyone not be curious?
mav and mo are not remiss in their warnings about cheap gamma, i am clear on that. i just think a warning is great; but adding , "this is one way i might do this" is even better.

Domestic,

I don't think any retail trader can trade like mav because he is using haircut. His method doesn't work for retail. Haircut trading is very different from reg-T.

[edit] I better let mav speak for himself.

 

[MTE]

Quote from yip1997:

...In some of the hedge fund or CTA selling premium, they only risk less than 20% of the capital, and the remaining 80% sitting there. They consider the return using 100% of the capital instead of 20%. Why? It is the reserve money (the remaining 80%) that survive them during a big drawdown.

Do you have any links to that? I'd like take a closer look at that.

 

[RCMLLC]

PLease tell me this is a factual statement, and that you can back it up .... because I would really like to know who would pay a manager 2% to magement 80% of their cash.

Quote from yip1997:

Mark,

.......

In some of the hedge fund or CTA selling premium, they only risk less than 20% of the capital, and the remaining 80% sitting there. They consider the return using 100% of the capital instead of 20%. Why? It is the reserve money (the remaining 80%) that survive them during a big drawdown.

 

[cohenmichaela]

I understand the point. High kurtosis is a known issue with pricing options using inefficient distributions. Thus the volatility skew exists to increase the value of OTM options within the model and accomodate for the increased probability of a larger (multiple sigma) move.

Mav is saying OTMs are too cheap. My question was whether he believes this is because IVs are too low with current skews (as quoted by MMs) or that public supply and demand has driven the IV down (or some other reason).

Cheers,

-Michael

Quote from optioncoach:

I think the point is that they are drastically underpriced when the black swan move is taken into account. There is no way to effectviely price in a 150 point drop in the SPX which could occur if some dirty bombs go off. So when considering THAT kind of risk, the point is the options are underpriced. It does not mean in general that they are selling at a nice discount.

 

[rallymode]

Quote from RCMLLC:

PLease tell me this is a factual statement, and that you can back it up .... because I would really like to know who would pay a manager 2% to magement 80% of their cash.

Carrying high cash balances isnt unusual if you are strictly trading options and using high r/r strats. I know people who carry 95% cash on their books and return 30-40% annually and their investors are quite happy. Take a successful stock daytrader who is managing an account. They will be 100% in cash at the end of each month. It's all a function of how much volatility you(your investors) are willing to tolerate.

For example. Say you have 1m under management. If you average 100% return on risk per position or stated another way, your positions earn at an average of 1:1 risk/reward then each month you are willing to risk 5% of port value you are making 5% in return. Obviously, doing this will leave 95% just sitting there each and every month. This assumes trading with retail margins. If you have haircut, you will have even more excess capital.

Using capital efficiently is a whole other subject.

 

[Cache Landing]

Quote from RCMLLC:

PLease tell me this is a factual statement, and that you can back it up .... because I would really like to know who would pay a manager 2% to magement 80% of their cash.

My mangement company does this for our clients for the most part, and we charge 2% AUM and 20% carry (performance based).

We've stated a target annual return to our clients as well as what we feel is an acceptible volatility in achieving those returns. From those two elements was developed a strat that only requires active management of 15-20% of capital. I don't think I need to state returns but let's just say that we expect to consistently be in the top quartile.

Our clients are fine with those returns and we actually don't need to utilize the remaining capital, but not doing so would be a waste. So I developed a couple variations of some popular conservative long term strats that produce returns that outpace inflation.

Anyway, that is one of the things that our clients love about us. They love the idea of having a ton of dry powder and never over leveraging the capital. You tell them that and their eyes light up.

 

[RCMLLC]

Yes, you are correct. I was under the impression that he equate that to more general than it really is. It does depend on r/r and what trades you are on.

Quote from rallymode:

Carrying high cash balances isnt unusual if you are strictly trading options and using high r/r strats. I know people who carry 95% cash on their books and return 30-40% annually and their investors are quite happy. Take a successful stock daytrader who is managing an account. They will be 100% in cash at the end of each month. It's all a function of how much volatility you(your investors) are willing to tolerate.

For example. Say you have 1m under management. If you average 100% return on risk per position or stated another way, your positions earn at an average of 1:1 risk/reward then each month you are willing to risk 5% of port value you are making 5% in return. Obviously, doing this will leave 95% just sitting there each and every month. This assumes trading with retail margins. If you have haircut, you will have even more excess capital.

Using capital efficiently is a whole other subject.