SPX Credit Spread Trader

[Maverick74]

Quote from jeffm:



Here is my cynical view on short gamma:

1) 95% of all traders and all strategies lose money

True.

2) A good premium collecting trader can make consistent money.

This is of no importance. That's like saying a savy drug dealer can make consistent money. At what cost though?

3) Any short gamma trader (good or bad) can be wiped out by a 3+ sigma event.
So if I can be a good short gamma trader and my only fear is a rare catastrophe, I'm already way ahead of the other 95%. Is that so bad?

No, a short gamma trader can be wiped out by a 1/2 sigma event. Seriously, do you trade. I am not talking about 10 sigma events here. I've seen short gamma traders wipe out on 5% moves. They happen on a daily basis. LOL. Your only fear is not a rare catastrophe, that's your broker's fear as all your money will be gone at this point. LOL.

If I'm a bad short gamma trader, I will join the other 95% regardless.

No, there is a big difference here. Who said that 95% of traders lose everything? No, 95% of traders are not profitable. There is a big difference between being not profitable and losing everything. LOL.

 

[Bben1006]

Yip,

Thank you for your response. I promise—I will not learn from you.

However, if you plan for your ‘strategy’ to exploit some temporary market inefficiencies, please remember that there are literally thousands of professional traders, well equipped with power computing, who are seeking these as well. These ‘inefficiencies’ if lead to arbs, will only last seconds if not less. So take this into account when you invest energy and efforts in further developing your strategy. Your best bet I guess, is to invest in trading skills and minding your risks.

Regards,

Ben

Quote from yip1997:

Ben,

There is no strategy that will provide you a positive expectancy, and I haven't tested out my 'haircut' strategy yet.

It is hard to explain my strategy because it is not a single step. It is a sequence of actions based on the market actions. Because of the sequence of actions, I will pay a lot in commissions. Will I have a positive expectancy with my way of trading under pure random market movement and efficient pricing assumption? Probably not. But there are time pricing is not that efficient, and market is not pure random.

Just like playing chess, no one can tell you the exact steps to win a game even with the same opponent. No one can teach you how to become the world champion. You have to learn the rules and some basic principles. Option trading is no difference from playing chess.

I am no option expert. So don't learn from me. My trading style won't work for you.

 

[rallymode]

Quote from jeffm:

I don't think you can separate risk/reward and probability of success/failure.

Jeff, while one shouldnt separate risk/reward from the probability of winning, it always amazes me how people tend to use a low probability of a loss as some kind of a defense. If there is a 1:9 chance of a loss, that doesnt mean you will only have 2 losses out of the next 18 runs. You can easily get 3 or 5 or even 10. Doesn't anybody care how long it takes to simply come back from such a distro even if you manage to survive?

 

[domestic]

Quote from Maverick74:
No, a short gamma trader can be wiped out by a 1/2 sigma event. Seriously, do you trade. I am not talking about 10 sigma events here. I've seen short gamma traders wipe out on 5% moves. They happen on a daily basis. LOL. Your only fear is not a rare catastrophe, that's your broker's fear as all your money will be gone at this point. LOL.

so mav, if i sell a high probability trade for 3 pts 11% outside the market and then the next day the market takes an 8% move against my position....won't a buy stop for 6pts(of which i have) save me from catastrophe? isn't that 2:1 risk reward similar to the trading that rallymode has discussed as one way he trades? i ask you, can i get out with those buy stops in a fast moving market? if you say that it may not work, then i must look at things.

how about (assuming one is quick enough) go short or long on the underlying with stops there too? is any of this possible to save ruin? i would think the credit spreaders would also be similarly inclined to protect themselves this way.

i must ask you (mo too), is much of what you say here derived from cottle? i ask because some parts of your responses sound like they were taken verbatim from his book.

anyway, that is how i trade at the moment. if i make it to december 31 intact, i will reassess my short premium trades.

 

[Maverick74]

Quote from domestic:

so mav, if i sell a high probability trade for 3 pts 11% outside the market and then the next day the market takes an 8% move against my position....won't a buy stop for 6pts(of which i have) save me from catastrophe? isn't that 2:1 risk reward similar to the trading that rallymode has discussed as one way he trades? i ask you, can i get out with those buy stops in a fast moving market? if you say that it may not work, then i must look at things.

Hell no that stop won't be honored. This is not a stock. A stop order in options is meaningless as all the mm's have to do is widen the vols on the selloff. If you have a stop mkt order, they will not fill that option at 3 pts, but 15pts. Don't laugh, we use to do it on the floor. And we had every right to do it too. If you have a stop limit, your order simply will not be filled. It's as simple as that. Guys, do not use stop orders for options. Your fill alone could blow out your account.

how about (assuming one is quick enough) go short or long on the underlying with stops there too? is any of this possible to save ruin? i would think the credit spreaders would also be similarly inclined to protect themselves this way.

No, this will do nothing for you. Selling the underlying into short puts simply converts your naked short puts to synthetic naked calls. Same risk, different direction.

i must ask you (mo too), is much of what you say here derived from cottle? i ask because some parts of your responses sound like they were taken verbatim from his book.

No, I did not take this from Cottle's book. LOL. Although he has put in a call to me. I guess I should return it. LOL.

anyway, that is how i trade at the moment. if i make it to december 31 intact, i will reassess my short premium trades.

 

[jeffm]

Quote from Maverick74:
That's like saying a savy drug dealer can make consistent money.

Oh Jesus! Now short gamma traders are drug dealers! Maverick's been banging his shoe so hard it must have bounced back and hit him in the head

I hear Max Ansbacher is a sheep molester...

No, a short gamma trader can be wiped out by a 1/2 sigma event.

No a bad, ridiculously leveraged short gamma trader can be wiped out by a 1/2 sigma event. Any fool can get themselves wiped out in 1 easy trade if they set themselves up for it. There are a million ways for bad traders to lose. We're back to the 95% metric.

Seriously, do you trade.

You always fall back to your subtle insults and superiority complex jabs. Your posts are much better without them.

 

[Maverick74]

Quote from jeffm:

Oh Jesus! Now short gamma traders are drug dealers! :
I hear Max Ansbacher is a sheep molester...

I thought the example was good. You are confusing possible outcomes with path dependency. A common statistical blunder.

No a bad, ridiculously leveraged short gamma trader can be wiped out by a 1/2 sigma event. Any fool can get themselves wiped out in 1 easy trade if they set themselves up for it. There are a million ways for bad traders to lose. We're back to the 95% metric.

Are you serious. A 5% move in the SP right now would be an 80 handle move. Why don't you take a survey here and see how most credit spreaders would do to their put spreads if the SP made an 80 pt move down. And these are credit spreads not naked puts. If you want me to run the theos for you, I will because I'm a nice guy. You be amazed at how they explode. And no, it doesn't require you to margin your whole account, maybe 25% would do the trick. Anything less then that and you won't be earning a respectable return for the position. You are not trying to make 6% a year are you? LOL.

You always fall back to your subtle insults and superiority complex jabs. Your posts are much better without them.

Actually I find these comments are appropriate considering the absurdity of your posts. I mean seriously, take some time out tomorrow and re-read them again and get back to me. If you don't think an 80 handle move in the ES would blow your naked puts to kingdom come, I have to assume you have never priced such an event into your spreadsheet. Or worse yet, you may not be pricing your options at all. :eek:

 

[jeffm]

You are correct. We have been talking r/r and w/l%, but we have totally ignored position sizing. If 2 or 3 consecutive losses puts me out of the game, then I was overleveraged and I will take my place among the pantheon of losers. However, that is a mistake of money management, not strategy. Anyone who bets too much is setting themselves up for a fall. Doesn't matter what method they trade.

One of the short premium traps is that the high w/l rate suckers people into larger and larger relative position sizes. Then when the ugly trade does come along...oof! Plus, they are so used to the easy money, they will refuse to take the ugly loss while it grows into a murderous loss.

There is a reason the 95% loser number is so damn big Lots of ways to end up with the disappointed majority. The failure mechanism varies with the different trading styles, but the end result is the same.

Quote from rallymode:
If there is a 1:9 chance of a loss, that doesnt mean you will only have 2 losses out of the next 18 runs.

 

[jeffm]

I'm done for tonight. I'm a fan of civil discourse. You are not. I'll move on and let you crap on someone else's shoes.

Quote from Maverick74:
Actually I find these comments are appropriate considering the absurdity of your posts.

 

[Maverick74]

Quote from jeffm:

I'm done for tonight. I'm a fan of civil discourse. You are not. I'll move on and let you crap on someone else's shoes.

Listen, I know the SP vols forward and back because I price them all day. I'll tell you what. You give me a trade in the SPX or ES you would do as your "short gamma trade" and the size and I will tell you how much you would lose on that position on a 5% move. Also how much you would actually earn on a 100k account lets say selling that cheap gamma. If you earn double digit returns without exceeding a 30% drawdown on that 5% move, I will issue an apology. How is that? Let everyone on this thread benefit from your claim to see what the real numbers are. The ball is in your court. I'm sure Dr. Phil would be interested in seeing this too.

Anyone else want to see this?