SPX Credit Spread Trader

Quote from 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.
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But jeff, the size of the bet is irrelevant as the reward is tied with the risk. Small bets wont wipe you out but what are you actually making for the risk you are taking?

The only time position sizing is relevant is if you are varying your size according to the odds in the same manner that card counters beat the odds in blackjack. Unfortunately, the market is not as finite as 4 decks of cards shuffled together.
 
Quote from rallymode:

But jeff, the size of the bet is irrelevant as the reward is tied with the risk. Even if you are not wiped out, what are you actually making for the risk you are taking?

The only time position sizing is relevant is if you are varying your size according to the odds in the same manner that card counters beat the odds in blackjack. Unfortunately, the market is not as finite as 4 decks of cards shuffled together.
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I have tried to explain this to him to no avail. What he and a lot of people are not understanding (which Dr. Phil does now) is that there is a catch 22 with selling premium. You either sell very little and earn a miniscule return, or you sell more and risk blowing out your account. There is no way around this mathematically. No matter how hard you try.

Phil was selling bounded gamma (iron condors) in which he was risking 250k to earn a pittance of 6k credit. Let's say Phil has a 500k account. Phil realistically could make lets say 60k over 10 profitable months (6k times 10). And let's say on the bad months he loses an amount equal to his credit (6k). So, after 12 months he has made 48k (60k minus 12k). Or roughly a 9% return. However, he was willing to risk a 50% drawdown to get this 9% return. Folks, you can make a 6.5% a year in a CD with zero drawdown!!!!!!! Why would you risk half your account for an extra 300 basis pts??!!@?!@?@!@?!@?!?

This is my point. Now if we remove the wings and go naked on those options, your risk is probably 5 times that with only a slightly higher return. This is the rub guys!!!! You can't get around this. This is one of the reasons, your beloved Coach has moved on to diagonals and other trading ideas (daytrading futures).

I will let JeffM redeem himself though and show us how he beats the mathematical odds by producing a high unleveraged return with little to modest risk using naked options. I am all ears.
 
Quote from Maverick74:

Folks, you can make a 6.5% a year in a CD with zero drawdown!
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mav, which bank offers 6.5%? I havent seen any of those in chicago. That's slightly better than my short the TIPS synthetic bet. :D
 
Some people are so in love with the "perceived" easy money of naked premium that they don't realize they are risking account blow outs for chciken feed premims. Do you have any idea what you are risking to make the premium?

Mav, you can scream till the cow comes home but a few will never fear it until "it" happens to them one day.
 
Quote from Maverick74:

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?
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Mav I'd like to see your numbers and benefit by the info. I in fact came to this forum when my web search showed you guys were doing a lot of ICs in this journal and that is what I had just lost big in in the Oct run up after doing remarkable well before then.

I have since learned that position sizing is very important since an early loss or a series of consecutive losses makes it damn hard to recover or not loose patience and stay the course with small incremental gains and not get tempted into larger positions size bets (a-la martingale). Fortunately my losses were in a speculative area of my portfolio so overall I am still "OK". I am still of the opinion that if one avoids an early moderate to large loss and can maintain modest position sizes & does not attempt to perform a "compounding" strategy (anti-martingale) then it may be possible to still show a reasonable return at the end of any random calendar year. It would be fortuitous to get a moderately long run of early wins - say 4-6 months to give the luxury to take a moderate loss now and then.

My current personal objective is to get back to "even" and recover from the one large Oct loss and then scale back out of the cheep gamma IC play but to continue to play it as a "hobby" position. I also note that by playing the SPX with the IC it focuses me personally and intimately with the day to day trading dynamics of the SPX from an unbiased neutral perspective since I am at risk or benefit simultaneously from both the upside and the downside market trends. My theory/hope is that this focusing may improve my ability to enter other core positions more effectively to get better net returns (e.g. resolve to a market timing edge).

TS

p.s. Try to be more patient and tolerant of those of us who respect your opinion but have not had the benefit of your experience and insights. It is a natural human desire to seek new ways of looking at old problems and truisms and adapting. Some of us simply need to fall down now and then to learn the same painful lesson that you can learn through analytical means.

p.s.s. I'd never play Russian Roulette even if I thought the gun was completely empty. But I'd probably trade some state lotto tickets I picked up at a garage sale and at discount by bundling them with something else I did not want and reselling it all for a premium.
 
No one doing credit spreads should use more than 50% of their portfolio to do so. I have gone as high as 60% at times but anyone who blows up doing credit spreads is using too much of their account.

A bad move causes a nice drawdown and most likely a losing year. The extent of the losses and drawdown all depend on how much you put in and how soon you get out. Credit spreads are not meant to be a core part of anyone's portfolio.

I know why peple do not like credit spreads but if you trade it correctly then the drawdowns should not blow you up. You can control the max level of damage.

Also most people tend to want to be in every single month. I have no NOV positions at all since the premiums are not what I like (low vols) and I have no problem letting NOV pass me by. I am also not getting the fills I want for DEC and not going to chase premium just to be in it and end up at a strike I am not comfortable with.

No one can prepare fully for black swan event but you do not have to put 100% of your capital at risk either...
 
Quote from Bben1006:

Yip,

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

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
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Ben,

To me, option trading is a NP problem. It means no one / no supercomputers nor algorithms can prove he/she got a complete solution. There are thousands of ways of making money in trading options, and trillions of ways of losing it.

Trading is a process, and I try to solve it using process control theory.

I am not exploring market inefficiency not because I am afraid of competing with pro or arb. The main reason is I won't get a reasonable return with limited capital. I believe no arb can survive under reg-T.

Let me ask you a question.

Statistically the market has earned around 8% more than Fed rate (Feb rate has never be negative). Why doesn't one invests in the market with the possible leverage he can get? Whats wrong with betting on a game that has shown a positive expectancy statistically?
 
Quote from jdi:

Mav, agree! BUt what about flying? Low probability of crash but when it happens........
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You're OK as long as your landings equal your take-offs. It when you're short landings that you're in trouble. :D

Cru
 
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