SPX Credit Spread Trader

[TrendSailor]

Quote from momoneythansens:

With respect to statistics and doubling down and/or not losing a few times in a row, perhaps you'l like to cast your eye over this: Gambler's fallacy

MoMoney. [/B]

I don't know what the social protocol is on this board. I don't want to "hijack" a very very good topic with off-topic or tangential discussion. But I'd like to make one more comment/observation on this:

A large percentage of options traders are chartists. This is precisely where resistance and support lines and trends and tons of stochastic and predictive methodologies and metrics come from. In essence instantaneous expectation of trend is built into the pricing structure of options at any moment in time; but it is also a function of pure supply and demanc; itself a function of expectation and risk-reward. In essence anyone who is in the market is operating to some kind of narrow or broad view of the "gambler's fallacy" since everyone is expecting the market to either remain static, move up or move down to precipitate profit or they would not be in the market at all.

Ultimately we options traders don't like to be likened to gamblers and prefer to think of ourselves as either insurance buyers; sellers or resellers - sometimes both at the same time. But again many people think of insurance agencies as gamblers also. I don't know why society attaches a negative connotation on one class name but not the other. But then again Irrationality seems to be important to the market and to market dynamics as much as fear and greed seems to be germain to humans.

From my perspective the only thing that really matters is how long one is exposed to risk, how much of total net worth are at risk and for how much and how many wins or losses we have in a row before we meet pragmatic limits and exit a net winner or looser or reduce our risk profile and seek a net "fair" average risk-reward. My fear is in the long run we all degrade to treasury bond holders and that might be a fate worse than death...


TrendSailor

 

[rallymode]

Quote from TrendSailor:



In essence instantaneous expectation of trend is built into the pricing structure of options at any moment in time;

That has got to be a new pricing model you are talking about.

 

[momoneythansens]

Quote from TrendSailor:

I don't want to "hijack" a very very good topic with off-topic or tangential discussion.

Essentially, by convention you're not really meant to post on this thread unless it is off-topic. Do not under any circumstances use the Options Forum to discuss general option topics. Instead, post them here. You can occasionally post something pertaining to credit spreads on the SPX if you really must...but don't over do it as it is generally frowned upon. I would suggest you maintain a ratio of off-topic to on-topic of at least 5:1.

In essence anyone who is in the market is....

My reference to gambler's fallacy was merely meant to serve a cautionary purpose. If you're comfortable with Martingale strategies et al then fair enough. You seem to have a firm grasp of the mechanics involved.

Good luck!

MoMoney.

 

[yip1997]

Quote from TrendSailor:

Thanks MoM. I am actually well versed with probability and statistics from my prior scientific/engineering background. The thing that helped me form this unorthodox "attitude" or perspective about the double down approach is based on something I read at another options advisory site. Admittedly it is not something I was taught in college and I have traditionally been very conservative in this kind of thinking. However, in my studies we never constrained the the distributions by "groups" of trades. I can't quote my source but what I have become aware of is a probability table that predicts the probability of a number of concurrent losses for a given trade success/win rate in a 50 trade period. I think when the grouping is done this way there are generalizations that can be formed about the expected number of worst case runs of losses.

Here is what I have seen:
Probability of seeing at least X consecutive losing trades
Within a 50-trade period given an a-priori win rate statistic

Consecutive losses: X
2 3 4 5 6 7 8 9 10 11

80% Win Rate 86.5% 32.0% 7.2% 1.5% 0.3% 0.1% 0.0% 0.0% 0.0% 0.0%
85% Win Rate 67.2% 15.0% 2.4% 0.3% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0%
90% Win Rate 38.9% 4.7% 0.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
95% Win Rate 11.5% 0.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Given that the Iron Condor strategy on the SPX has about an 85%-93% win rate I think if one has deep pockets it may pay to double down. My problem is my nads are not that large yet or I am not that desperate... yet. It may be a chicken and egg problem though and I can't afford the futures hedge on my family tree without subjecting myself to the possibility of being hung by same...

Thanks for your comments.

TrendSailor

TrendSailor,

If you are really good at probability, you should know the true meaning of randomness. Probability of winning any IC won't change because you just had a big loss. LOL. Your probability of winning is still around 90%, and you still have a 10% of losing.

If I flipped a coin, and had 10 heads already, what is the probability of getting a head in the next time (assuming the event is actually random)? The probability won't change!!! The conditional probability is the same as the "unconditional" probability.

 

[TrendSailor]

Quote from rallymode:

That has got to be a new pricing model you are talking about.

I really did not want to distract from this wonderful journal discussion. But since you asked me a direct question I will respond briefly.

The Black and Scholes Option Pricing Model has expectation of stock price built right into it (examine the SN(d1) term of expected benefit from acquiring a stock outright). I think that makes my comments consistent with the pricing model and certainly within the limits of efficiency in option pricing...

But then again, I am one to get upset with all the "uneducated" kids and retiree out there busting all the models assumptions about it being an efficient market and following the assumption of markov process. Imagine these people having the nerve to make bids or ask orders from their home PCs without first pulling up their Black Scholes calculator before they submit their order. These vulgar miscreants probably go with their gut "feel" or "expectation" and think they can make a profit and I bet the older guys did it long before the model was even published.

TrendSailor

 

[LeonPhelps]

Quote from TrendSailor:

OMG this is GOOD stuff!!...I just lost 10% of my entire net worth and now and gun shy but intellectually know that it is statistically nearly impossible to get more than 2-3 losses in a row with this system...has enough financial wherewithal to double down at least two times after a losing period there are exceptional probability of making a nice yearly net income...if one has the gonads one should adjust endangered positions that happen close to expiration by attacking the market in the direction is is attacking your IC by taking advantage of high premiums and doubling down...It seems fear and flight result in the largest possible losses...TrendSailor

Whoa, Nelly!

http://www.elitetrader.com/vb/showthread.php?s=&postid=1221747&highlight=loss#post1221747

http://www.elitetrader.com/vb/showthread.php?s=&postid=1224532&highlight=loss#post1224532

 

[rdemyan]

Can someone remind me of what 1 tick on the E-mini SP500 is? Is it 0.25 points?

Thanks.

 

[El OchoCinco]

It is .25 = $12.50

Quote from rdemyan:

Can someone remind me of what 1 tick on the E-mini SP500 is? Is it 0.25 points?

Thanks.

 

[TrendSailor]

Quote from LeonPhelps:

Whoa, Nelly!

http://www.elitetrader.com/vb/showthread.php?s=&postid=1221747&highlight=loss#post1221747

http://www.elitetrader.com/vb/showthread.php?s=&postid=1224532&highlight=loss#post1224532

Yeah tell me about it - this is why I am at this forum to learn better adjustment strategies since this is the exact same period I lost about $65K on a large OCT SPX 1365/1375 Credit spread. The upside volatility has been extreme with the S&P just about riding straight up at a 10-20 point/week clip along its 10 day moving average for 2-3 months. I know I was at risk forming the call side of the condor. I even attempted to hedge on a fortuitous 10 point drop near expiration and the friggin market immediately came right back at me (as if it was personal) and ate my hedge at a rise rate of 10 points in one hour. After eating my escape plan/hedge and chasing me out again it then nonchalantly dropped back down 10 points at the close. I also learned about obscure day trading rules on short ETF options that day as I had to close out my hedge the same day I bought. Good grief that sucked to discover that even a covered spread does not mean squat to SEC if you go in and out a SINGLE time on a ETF short position in the same day. Nothing like getting a $350K Day Trading call with plenty of cash present to cover the actual trade to ruin your weekend...

Thank God I was able to get out though for about half way into the spread since SET later gapped up 7 more points 2 days later; and that was after is trended up 10 more points to the next strike range the day just before. It was like market maker's candy land and there must have been a hell of a lot of traders squeezed into oblivion trying to cover their shorts (pun intended too).

My lesson learned is - enter the SPX IC strategy in small steps month to month with a moderate number of contracts. Then slowly add more contracts each month as you bank income. In this way you can build up some wins and not get washed out of the system before you have some "income generated" with an early loss. After a few months then start upping the number of contracts but always keep a good part of working capital in reserve in case you get wiped out in the first 4-5 months. Before my loss I was up over $40K in 5 months of trading (new IC each month). As luck would have it the very month I went in with a large number of contracts the market went insane to the upside on overzealous market sentiment. That Oct upward S&P volatility took me out hard and put me big time negative for the year. I am now trying to decide if I want to take the time to win it back slowly or double down a few times to try and get back to even fast or give up and take my expensive lesson and go more conservative with mediocre 4-10% gains per year in lower risk trades.

I think with the S&P IC strategy as long as you do not lose right away and do not get greedy and keep increasing the number of contracts in large blocks each month you can still live make a good income and still come back if you do have a bad month. But losses really do hit principal hard when they do kick in and that can take the wind right out of one's sails.

From my current loss perspective S&P IC is like a roulette wheel that hits a win 90% of the time. If you get greedy and keep all your wins on the table to compound and do not bank your original principal then eventually double zero comes in and its all gone. When that happens you have to decide to walk away or come back with more reserves and hope you don't lose early since that puts you overly risk adverse and on defense for a long time just trying to get back to even.

TrendSailor

 

[dagnyt]

Quote from TrendSailor:

From my perspective the only thing that really matters is how long one is exposed to risk, how much of total net worth are at risk and for how much and how many wins or losses we have in a row before we meet pragmatic limits and exit a net winner...

TrendSailor

I'm sure you understand this, but it's worth mentioning: After you have two consecutive losing months, the probability of losing the next month is UNCHANGED.

Thus, don't feel overconfident that the 3rd month is going to work out well.

Edit: I see someone beat me with a similar response.

Mark