Quote from TrendSailor:
There are not very many choices here. Either you deliberately misrepresent what I have been saying, or you fail to understand. I'll say it again:
The credit received when opening a position plays zero role in intelligent risk management. It does make a difference in the eventual profit and loss (I never said that before because it's so obvious).
... I'll be brief & leave you with a final concept to ponder.
Most FOM credit spreads generate very small premium... slippage and minimum price bids ($.05) make initial credit received extremely important.
Agree in principle, but why would you want to open a spread with a very small credit? The size of the credit plays a huge role in the decision on whether to open the position.
In fact the real art... in FOM ICs is done... in "getting in" as high as possible and opportunistically adding on momentary IV spikes. But often the premium received is so small that there is NO pragmatic room to actively manage the position at all and still remain profitable.
If premium is 'too small' why open position?
No one is suggesting actively managing position. But, when prudent risk management dictates that the position is not ok - then you must a) ignore risk; b) adjust; or c) close.
...The greater the initial credit the more trade space we have and the better our P-L theoretical becomes compared to an identical position put on for lower credit...
No kidding. Wow.
That should make it obvious that initial credit is important in forming the metric for assessing (e.g. managing) if we are on schedule for realizing our credit relative to expected time burn.
Nonsense. Sometimes you cannot meet your expected profit from time decay. Sometimes you must adjust. What you are saying is that if the credit is too small, then you ignore risk - because you cannot afford to make an adjustment. But, if the credit wre larger, then you would adjust. That is utter nonsense.
...That's a "scale" effect that permits me to sell less net delta liability for the same dollar take home.
You are confusing the issue. I never told you to sell more spreads at a lower premium. I never told you to sell a spread for any amount that is too small for you. And I certainly never suggested the ridiculous stance of selling enough spreads to generate a specific 'take home'. You cannot force the market to give you what is not present. Have you noticed that a huge fan of ICs - Coach Phil - stays out of the market when it does not give him what he seeks at a decent r/r? I sell what I am willing to sell (based on risk), and if the profit is less that month, so be it. Cannot take more risk than is prudent just because premiums are low.
What I said - over and over - is that once the decision has been made to open the position, then managing the risk of that position does not depend on the credit you received. Risk management is performed to protect your portfolio - not to try to force a profit on each position that is at risk.
...winning credit positions traders have the opportunity to realize a greater total net dollar income earlier with a larger credit than they do with a smaller initial one (for the same number of contracts).
You state the obvious - but this has zero to do with risk management.
Given two identical positions put on in separate accounts with different initial credits that means I may be able to exit one earlier than the other to put real dollars in my pocket. QED initial size and expectation matters.
Again you state the obvious, but your QED conclusion has zero do do with what I have been saying. Of course the higher credit leads to higher profit (or smaller loss). It must - by definition - unless one becomes careless in managing the risk of that higher credit position. Risk management determines when the position is shut down. Initial credit determines the relative size of the profit or loss - but has zero do do with risk management.
So yes, I would hold the $400 dollar position longer if my expectation was unchanged since I have more margin for error before the position goes negative.
QED: You fail to understand the principles of risk management.
Cheers,
TS
Cheers
Mark
