Tips, Tricks & Nuances Of Making Strategies Work And When And How?

Well I only got a trade on in GOOG.

In my learning process, I am learning that whether you use a credit spread, or a debit spread, the strike price OTM you choose to sell, is the same.
The difference is that the credit spread gives you money up front, but the trade off, is that if the trade fails by market action in the direction of your sold strike, you will lose a lot more.

In the debit spread, you incur a cost, to put on the trade, but your loss is capped at that amount you spent to get into it. Which said; loss would be a lot less than the credit spread.

Otherwise they function the same, for purposes of collecting THETA.

Interesting knowledge I'm picking up here.
 
Trading LONG STRADDLES in the OVERLAPPING STRADDLE system.

I just finished doing this in real cash. I lost, but not much. I was using 2 month out options. I was sorry I didn't do it in paper money web based trading.

Even despite the loss, the method works. The changes would be; a) to go further out in months. Say 5 to 6 months LONG STRADDLES. b) convert the losing side to a debit spread and let it lay until it gets hit a month later, or so.

What I did, was let a LONG STRADDLE run until it equaled the distance of the weekly ATR, of the index I was using. Then cash out the profit of the winning side. You then got stuck holding a losing option on each LONG STRADDLE. In my test case, I used QQQ and implemented a LONG STRADDLE every two strikes. After closing the winning side and taking the profit, I tried averaging down the losing side. Have to report that didn't work well at all.

To do it again, I would simply convert the losing option into a debit spread and let it ride. Going out say 5 months options, then you have time on your side and you can wait for market action to breakeven on the losing side. I may one day try it again, but in paper trading web based and see the results. Not right now, got other fish to fry.
 
I got the following two tricks, from the LAZY TRADER website. Haven't tried them yet, but since I'm playing with learning the Debit Spread and so the HALF CONDOR. I thought this was interesting and will give it a try this coming week.

Instead of using a CONDOR, you make the DEBIT SPREAD. If the debit spread goes into making some profit, you can lock that profit in,without taking that profit right away. Then you LEG IN to the credit spread side of the CONDOR trade. You would be using all CALLS, in a bull and bear spread, or all PUTS as in a bull and bear spread. This enables you to pick up some TIME DECAY ( theta ). You let both spreads in the now LEGGED IN CONDOR run through to expiration. I am presuming that you would save on commissions as they expire. I'm fairly sure the credit spread expires, but not sure about the debit spread? Maybe somebody could tell me?
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A similar trick the LAZY TRADER says; is used, doing the BOX SPREAD. You leg into the two sides seperately. Otherwise it is a neutral trade. So do one debit spread in either CALLS, or PUTS first. Whenever you get a bit of profit in it, THEN you do the opposite in PUTS, OR CALLS, to make the BOX SPREAD. This is supposed to lock in the profit on the first debit spread and give you some time to earn a profit on market reversal on the other side. I guess you either wait for expiration, or you close them both once you get the second, put, or call, debit spread in the profit also? I'm just thinking about this stuff. No practical experience with it yet.

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The debit spread premiums stay the same, no matter how many months out you go.

I was pricing the premiums on debit spreads, which I'm experimenting with and learning in TOS paper money. I found something interesting. The premium you debit is the same, whether you use 1st, 2nd, or 3rd month out options. Giving you more time. One guy was telling me he trades using 9 month out options. The premiums to buy and sell increase in price, but the spread stays the same. No matter the month. Just something I learned accidentally here.
 
Agreed!

But a straight buy is subject to time decay losses. So people spread, so they can sit it out, if their guess is wrong. Removing some of the profit but also some of the risk.

I can't remember now, but vaguely recollect that in a method of letting profits run, and cutting losses short, it takes about 7 profitable trades to make up for one losing trading.

Many trading strategies are best suited to special kinds of markets. Like directionless, or congestion. Or trending.

Congestion, or low VIX markets are probably best with spreads, as otherwise, the time decay is faster than any subsequent trend profit.

Overall I'm a loser, so don't take my ideas as gospel. I'm still not steadily profitable. Been unable to do so, except in credit spread trading. Unfortunately a BLACK SWAN event eventually wipes out your account with that accumulative method. And to trade it smaller scale is not very profitable versus the risk.
 
Some sage traders on ET have made the point that to be successful you have to be able to predict direction or volatility. Once you can do that, then step 2 is choosing an options strategy with a risk/reward profile that suits you.

So step 1 is getting a handle on direction or volatility. While I don't have any advice to offer on how to do this, I do believe this is the logical progression for how to become a successful trader. This means that jumping to step 2 with discussion of various options strategies is not going to get you anywhere until you solve step 1.
 
Well I lost on my CALENDAR experiment. So, don't trade calendars ( grin )

Having spent the last few months dancing around stocks, earnings reports, indexes and such. I think I'm going to revert back to indexes.

I'm not sure of the relationship between the QQQ and IWM, but they trade roughly the same in lockstep fashion. What I'm noticing IWM trades bigger swings, which would make a debit spread pay, when in the equivalent QQQ, it would not necessarily be so.

Further experimenting with debit spreads reveals the following, when doing them in the IWM index. ( ETF ) The debit spread makes a $100. Of that you have your debit you incur, when you set it up. Plus factoring in the commissions it comes out like a possible .30 cent profit if you clear the complete spread. I'm thinking of not entering a debit spread that costs no more than .50 cents. With .20 cent commissions in TOS, that means .70 cents of your possible $1.00 is used up. So you are left with .30 cents.

Just finished going over my past week experimental trades. In the IWM it would cost you $500 debit at .50 cents, plus $200 commissions using ten contracts, using TOS. Of this if your direction is right you will make a net profit of $300. If your debit spread fails to work, you will lose your debit plus commissions. Which is $700. So your possible maximum profit is 42% on a trade, or $300 using ten contracts. In other words it is going to take 2.34 profitable trades to cover each losing trade. Remember your debit spread limits your loss as well as the profit. It's all based on getting the direction right. I thought I was pretty good at direction, but apparently not, if the last two months of experimenting are any indication. I found that the market had a tendency to not cover the spread strikes when you put it on, after getting a directional signal. You need a win loss ratio of 4 profits to one loss, to come out ahead.

That said; I'm giving up on playing around with various spreads and different strategies. At least for now. I'm going to concentrate on PATTERN TRADING. This is the only thing that has really worked consistantly for me. Unfortunately my account ( what is left ) is too small to allow me to day trade. I guess will give it a try and see if I can get enough strike movement, in an overnight trade. You only get two trades if you day trade, per week. Back to pattern trading, which I've previously done in the OEX and the QQQ. I'm going to try the IWM because it swings a bit wider in movement. Perhaps it will cover the debit spread strike width?
 
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