SPX Credit Spread Trader

[MTE]

Quote from rallymode:

...Using capital efficiently is a whole other subject.

Why don't we open it for discussion?

I've been doing some extensive testing on a certain premium selling strategy and this is the "problem" I run into. Using more than about 20% of the capital creates huge drawdowns, when you hit a losing streak.

 

[Crucis]

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%.

This is NOT a big deal. As I said anyone can keep books in any manner that provides useful information.

Mark

Hmmm, I would call that a 10% return. You invested $10K and you got the $10K back plus another $1K.

I'd take that any time.

 

[MTE]

Quote from Cache Landing:

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.

Hmm...interesting! Thanks for the idea, Cache!

 

[rallymode]

Quote from 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.

The less volatility you want, the more excess cash you are going to have. Of course, your average r/r needs to be in check and that can vary from style to style. Since i am always short gamma, i usually carry 100-110% in cash. In my opinion, leverage isnt necessary to achieve above average returns unless you are selling cheap gamma.

 

[Sailing]

TS,

Many different approaches.... I've been playing around with selling back month positions to purchase front month curvature... then playing the swings to capture DELTA movement.

It does present emotional risk... but allows for breakout protection.

M~

Quote from TrendSailor:

Thanks Sailing.
By trading skills here do you mean opportunistically closing out a portion of negative gamma on the side one thinks is most vulnerable to underlying motion or trading its opposite side (e.g. most winning side) by taking profits early to buy blocks of long in the expected direction of motion as we approach expiration? I am still trying to get my teeth into the meat of what you mean by trading skills. As best I can tell you are implying opportunistic trading of risk with loss mitigation or taking profits early. In other words optimizing one's outcome for current market dynamics (e.g. maximizing probability of net win or mitigating probability of net loss) by efficient trading with the least overhead and minimally added risk.

Can you help here?

Thanks,
TS

 

[RCMLLC]

I remember reading from one of the threads that you don't want to use haircut margin and only reg-t, so I assume you meant 100-100% cash but not that in buying power. Am I correct in my assumption?

Quote from rallymode:

The less volatility you want, the more excess cash you are going to have. Of course, your average r/r needs to be in check and that can vary from style to style. Since i am always short gamma, i usually carry 100-110% in cash. In my opinion, leverage isnt necessary to achieve above average returns unless you are selling cheap gamma.

 

[Cache Landing]

Quote from rallymode:

In my opinion, leverage isnt necessary to achieve above average returns unless you are selling cheap gamma.

Ditto. Although some would argue that when basing a strat primarily around derivatives, a trader is inherently leveraged. Not that I agree with that mentality.

 

[Sailing]

Mark summed it up well.

We traditionally looked at return on risk... or depending on the strategy, return on margin. I actually look at three profiles now. Return on Risk, Return on Margin, and with HairCut, we're getting a flavor for Return on Capital.

An entirely different approach.

M~

Quote from kapil:

Murray,

When you display your returns on the DD's and calendars, I believe you discuss return on margin. Do you also analyze returns on your overall equity base as well? I seem to consume very little margin (little kahunas) with options so I only analyze my returns on a total account basis. I would appreciate your thoughts as well as any of the other seasoned traders out there.

Thanks,
Kapil

 

[RCMLLC]

That is different from the way I have been utilizing my capital, but it is interesting nonetheless.

Can you give an opinion of an optimum (in your opinion) % of capital invested, and the r/r ratio desired of that invested capital?

Quote from Cache Landing:

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.

 

[Cache Landing]

Quote from MTE:

Hmm...interesting! Thanks for the idea, Cache!

You want another idea that I learned a while back from my professor in a "Capital Markets: hedge fund/private equity" course?

Develop a strat that is non-correlating with the broader market. Then they really love you. A huge portion of hedge funds out there are simply leveraged long only funds. An investor can find thousands of funds that show high correlation with the broader market. What they need to find is a fund that is non-correlated but produces returns greater than a money market fund. This balances out their port better.