Quote from rallymode:
What nice profit? $1 gained over 2 weeks on this wide CTM diagonal is what you call a nice profit vs the risk taken?
First, I do not to CTM diagonals. I do them further out. Second, I hold my positions a lot longer than Phil. Third, the point I was trying to make is that there is nothing wrong with eliminating risk and taking profits. A $1 profit on a $2,500 haircut in 2 weeks is a very good pofit by anone's standards. If you make 4% in 2 weeks, you can double your money every 9 months. Again, ignoring Phil's trade, I tend to take profits early under two conditions: a) the position is too close to the money and the negative gamma is too high, making the residual risk (and reward) too great. I'd rather move my cash into a much safer position (and collect another cash credit for doing so) and b) The markt is running away from my strikes and there is a fair chance that the cash credit I can take right now is going to shrink. If neither condition is met, I hold longer.
But - there is nothing inherently 'right' or 'wrong' with what I do or with what you do. Risk is in the eye of the position owner and if you advise anyone to just hold on a bit longer for the 'easy money' when that person is NOT COMFORTABLE holding, then you are doing a disservice to that advisee.
With what do you intend to cover the loss on the next trade when you guess the direction wrong?
I NEVER guess direction wrong because I never guess direction. I firmly believe that almost no one can do that consistently. What I do is sell puts and calls as far OTM as provides me with a decent cash credit on my diagonal spreads. Any residual credit I get when closing is a bonus - a bonus I expect to earn, but never predict just how large it will be.
Once those posiitons are on, my job is not that of a trader, but that of a risk manager. I'm going to make lots of money from my positions, unless something bad happens. Well, my job is to close positions that are too risky. That means I close when my short strike is breached and I close when a position provides risk I am not comfortable taking - or profits that are sufficient. Again, I am not looking for max rewards. I cut losses quickly and I want steady income. Month after month. Nothing wrong with being a hero, but I am not going to be one.
I guess we have a very different definition of risk/reward. Adjusting diagonals before expiration is shooting yourself in the leg over the long haul, unless of course your underlying prediction is no longer valid. Over the long term, the best expectancy with diagonals is earned the last week of the cycle, not by closing early with favorable market movement. Check it out on your own.
I do not adjust diagonals. I hold or close. Period.
No need to check. The last week obviously provides the best potential reward. But, it also provides a great opportunity for the profit already earned to disappear. The last 2 months provide examples of how that works. My preferred holding period for diagonals is 7 weeks out to 1 week out. I hold for those 6 weeks (on average) and am happy with the results. Look - I do not close positions at random. If they are well situated with respect to how far OTM they are, I hold until 15 minutes before the close on Thursday. I hold as many of my positions as I can. But, I do not want to hold them all. That is my comfort zone. It's obviously not yours. I don't go arountd telling you that you are making a mistake.
I've played the expiraion game to the ultimate whan I was a mrket maker. I've learned the risk is greaer than the reward and I'm very happy to be a conservative, money- making retail customer.
I hate to be negative but, in my opinion, the call diagonals have a poor risk/reward profile even when you account for the potential for better adjustments... Again, apparently we see risk/reward very differently
I find that the OTM call diagonals have been very profitable, and I love the risk/reward profile. Of course, I've had some that ran ITM, so I closed them for losses. But, very acceptable losses and part of the cost of doing business.
what makes you think you are much safer with this wide front month call diagonal? you dont even have vega point against your gamma risk. Atleast with the straddle i will get paid for my risk taken. You are not.
I get paid very well for my risk taken. That risk is not large. Those diagonals are painless to close when the strike is breached, even in an environment of shrinking VEGA. And when I clsoe on Thurs afyternoon, the rewads are very nuch to my liking.
And it's okay to disagree. One thing I know for certain is that anyone who believes he has the best, or only method for making money with options is out in left field. What I do works very well for me. Why would I want to try to do better if it requires taking more risk that I want to take?
