taking longs out of a fly
- Thread starter Baozi
- Start date
I've never found a useful method for establishing a directional view. Tried FA, trend following, lots of TA stuff... the only thing I came away with is a conviction that everything I've seen in that regard is voodoo taught by charlatans who use complex excuses for why it fails, and trumpet their "successes" when it doesn't.
If you have any suggestions, that would be terrific.
cannot go into details without (legitimately) violating an NDA other than to state that there is inherent predictive value in studying the shape of the wing and local-vol curvature.
Verb. sap., as they used to say in the old days - and again, greatly appreciated. I've got just enough of a clue at this point for that hint to be useful, and will definitely focus my efforts in that direction.
Still have to figure out the nuts and bolts of building a vol surface model - a decent quality data source, mostly - but I'll get there.
I believe trading strategies are just a byproduct of a process machine where you already have an absolute view on the market and a risk plan; options will come into play if they give a better risk/reward rather then using the underlying. Also, one could debate if most of the option strategies are actually useful to serve the retail trader mandate.
I could see why a strip/strap straddle might serve well a trader ("directionally, from the outset"). Yet, what's the actual use of a butterfly?
I could see why a strip/strap straddle might serve well a trader ("directionally, from the outset"). Yet, what's the actual use of a butterfly?
Thank you for your coaching.Welcome to the jungle, @ironchef - I'm at the same place as you are. The light at the end of the tunnel is that practice plus intelligence result in efficiency... or it could just be the oncoming train. I guess we'll find out!
You may be taking the numbers too seriously. Seriously. Also, assuming that you're going to do anything "mechanically" - vs. using your smarts and learned skills - is a losing strategy, and not worth assuming.
Sure, statistically the total expectancy of trading is zero - or, as you note, less. That's a lovely concept, and useful in some ways. But waiting for some statistical bogeyman to come and rob me of everything I've made so far (I wonder how he's going to get back all the money I've spent, the food I ate, etc.?) is a waste of my time; I've got trading to do, interesting things to learn, and so on. It's also worth considering the distribution of profits and losses within the trading population: who the hell says that every trader must eventually lose his shirt? As the old joke goes, you don't have to outrun the bear - just the other guy (who, in this case, happens to be half of all the traders in the world. I'm willing to take that bet.)
I.e., assuming that you're going to lose is not particularly useful - and anybody who claims that improving your trading skills is not a net positive is so full of shit that his eyes are brown and muddy.
Now, assuming you're pickin' up what I'm a-layin' down...
Flies, from my (small) experience and based on what I've learned so far, aren't just about direction; they're also about timing. They're not comparable to going purely directional, because the price moving too far (or too soon) in a fly trade will land you in negative P&L. Your opinion in opening one does not have to be "more right" than anyone else's; it just has to be right for the market - which no one can predict with any certainty (and thus be "right" ahead of time on.) If you do, say, a skip-strike put butterfly for a small credit, and the price ends up above your body strike, you will make that credit, end of story. If the price goes below the body strike, you have additional time/strike distance to adjust it; if it goes below your break-even, you can adjust, or accept stock, or make other decisions. Averages - which is what MMs and such have on their side - be damned; each trade stands or falls on its own, and that is something where statistics cannot apply.
(I'll note that I've never lost money trading flies yet. In fact, of the several hundred live trades I have taken since I started, more than 90% have resulted in gains, only a small percentage have been actual losses, and only two have been of any meaningful size (nothing comparable to the total gains.) And I'm still in my first year of trading options.)
Vol is easy to deal with by comparison to price - or at least easier. If I choose a stock with an IV rank of 100, what are its chances of going higher? That's a 50% improvement over price action right off the bat. Admittedly, I've had GLD stick at 100 for a good long while - but rolling it eventually put me in profit anyway. For a good two out of three high-IV trades that I've done, it behaved pretty much per spec.
Lest I make it sound too easy, it cost me lots of long days of study and practice, and I've spent more time feeling like an ignorant idiot - with money on the line! - than in just about anything I can remember over the course of decades. But... I'm getting there, feeling like less of one every day, and gaining in skills that I really value. I'll take that - plus the little bits of cash I've been making along the way - any time.
(Didn't mean to turn this into a book, but I guess I had a lot to say on the topic. Hope some of it is of use.)
Is is useful?
For me, until this year, a simple up/down bet was far more profitable than the combinations I tried. Maybe it is just gambling and that was why I kept thinking it was luck rather than skill.
A side comment, my tools are too primitive to analyze fly wing shape and volatility curvature.
+100 on this. The view and the plan are the most important by far; the technique used to trade that plan and view must be chosen to suit them, not the other way around.
One could. But not very well - in large part, due to your first point. How can you take advantage of your view on the market if you don't have the tools in your toolbox? Unless your views are always binary or trivially simple, you will lack the means to execute on them effectively.
The ability to take advantage of certain views on the market.