Trade management: adjustments

[Metamega]

I know literally nothing about options but isn’t this idea more of a “losing” psycholigical problem. If “x” trade is losing and you open “y” legs to offset losses.... wouldn’t it just be the same to close trade “x” and open trade “y” or just be flat.

Seems like I see these option threads all the time of people trying to salvage something that be just as easy to close.

 

[destriero]

There are no repair strategies for shorting wingspreads. Any repair strategy which results in a complete hedge becomes the primary risk. Building flies inside the wings, but short delta, is beyond stupid. What's the fly worth below 2700? Has it improved the PNL outside the wings?

Just admit to yourself that you're adding risk. If you're OK with adding to losers then have at it. If you're intent on "repairing" wingspreads then you're in the wrong line of work.

You are shorting stops. Sure, you can short stops at a large edge, but you should manage risks from the outset. IOW, shorting equidistant wing-strikes in SPX (not premium neutral) and DN-short futures.

 

[BlueWaterSailor]

Stupidity. All he's done is add more risk below the market. How are these inside flies going to protect him if the mkt blows through 2700?

IIRC, his concern was that SPX kept rallying and pushing the call side (I don't remember all that much about this trade, and can't find the video I snipped it from.) I'd have rolled up the put side to recenter - that's all I know to do in a situation like this - so this maneuver with the flies caught me off guard.

I could work through the different scenarios and figure out the possibilities and the associated risks when the price moves one way or the other... but that seems like a one-off waste of time since I don't understand the underlying principle.

If you can shed any light, I'd really appreciate it.

 

[BlueWaterSailor]

There are no repair strategies for shorting wingspreads.

Just saw this, right after my previous reply.

Well, I did ask for perspective - can't complain if it's one that basically knocks my previous concepts into the trash bin, especially from a professional. This, of course, brings up more questions: are you saying that shorting wingspreads is such a bad strategy that it's never worth using? Or is it a matter of initial trade setup, like only setting them out at such a low delta that they should never get challenged?

(And, as a matter of keeping an eye on the ball: not my trade; I'm not defending it; I'm not even very interested in it per se. My total interest in this thread, as stated, is to start getting a clue about more advanced defensive strategies.)

Any repair strategy which results in a complete hedge becomes the primary risk. Building flies inside the wings, but short delta, is beyond stupid. What's the fly worth below 2700? Has it improved the PNL outside the wings?

Just admit to yourself that you're adding risk. If you're OK with adding to losers then have at it. If you're intent on "repairing" wingspreads then you're in the wrong line of work.

Since I don't understand the adjustment, I certainly don't insist on it. Nor am I intent on repairing wingspreads - in fact, now that I've seen what you wrote, I'll be happy to avoid it... assuming I have some viable alternative that doesn't add up to "take a loss on all trades that aren't going according to plan." That's probably not what you're saying - but I don't know what the viable alternative is.

You are shorting stops. Sure, you can short stops at a large edge, but you should manage risks from the outset. IOW, shorting equidistant wing-strikes in SPX (not premium neutral) and DN-short futures.

Been staring at this for a while, and - nope, I'm not getting most of it. I'm willing and able to work as hard as need be to figure it out, but some help in understanding it would go a long way.

"Managing risks from the outset" - are we talking hedging? Deltas outside 1SD? Setting stops at some acceptable loss ratio?

"Shorting stops" - can't parse that at all. Google doesn't have any examples of that kind of usage, either.

"Equidistant wing-strikes in SPX (not premium neutral) and DN-short futures" is the only part I think I've got, more or less - something like "build the trade in SPX so the wing strikes are the same number of strikes away from spot regardless of skew, and balance the delta with futures."

@destriero, I don't know if you can bridge the gap between your level of understanding and mine. But I sincerely appreciate your attempt to help.

 

[BlueWaterSailor]

I know literally nothing about options but isn’t this idea more of a “losing” psycholigical problem. If “x” trade is losing and you open “y” legs to offset losses.... wouldn’t it just be the same to close trade “x” and open trade “y” or just be flat.

Seems like I see these option threads all the time of people trying to salvage something that be just as easy to close.

So your answer is simply to close for a loss any trade that doesn't go according to plan.

Well, it's a viewpoint. I'm not going to discard it immediately just because I don't agree with it - that would be stupid, because I'm exploring possibilities right now - but it seems to completely ignore the possibility of price or volatility reversion, which is the entire point behind making adjustments (assuming a psychological defect in people that use them seems rather too broad a brush.) Do you have a specific reason for discarding those possibilities?

By the way: if closing for a loss and opening another trade (call this option 'A') is, as you say, "just the same" as rolling (option 'B'), then - given that A=B means that B=A - doesn't that mean that people who practice either one suffer from the defect that you're postulating? Your premise seems flawed.

 

[Magic]

I trade SPX options pretty commonly. Far from an expert but here’s my 2c:

Comment above that you’re shorting stops. The wings are stops for other people. They buy them to cap their losses. Long wings is the risk hedge. IOW you can’t sell them and offload the risk. You sell them when you’re getting paid enough to be the risk holder. The risk mgmt is closing the position when that’s no longer true.

I personally never connected with all the talk about adjustments, rolling, etc. Trading options you should have a vol thesis, and at least a pseudo-directional thesis. If price leaves the area where you’re getting favorable exposure, the trade is over. You can start a new, similar one but that’s beside the point regarding the first trade.

If you realized more vol than you sold over a period, or vice versa, nothing that you do after the fact is going to change that. You were on the losing side of the trade. Happens sometimes. Has no bearing on what comes next.

No need to over complicate this stuff. Past losses are in the past. Every day I look at my exposures and I see if I like them or not. If yes I will keep holding until something changes that. If not then I take the unfavorable parts off.

 

[BlueWaterSailor]

I trade SPX options pretty commonly. Far from an expert but here’s my 2c:

Comment above that you’re shorting stops. The wings are stops for other people. They buy them to cap their losses. Long wings is the risk hedge. IOW you can’t sell them and offload the risk. You sell them when you’re getting paid enough to be the risk holder. The risk mgmt is closing the position when that’s no longer true.

Ah - the light dawns. Thank you very much, @Magic.

To me, 'stop' meant a stop-market order - and using one just didn't make sense if I was paying for wings. Again, all open to correction, but the two seem mutually exclusive.

I personally never connected with all the talk about adjustments, rolling, etc. Trading options you should have a vol thesis, and at least a pseudo-directional thesis.

As context: I'm fairly new to options and active investment, but due to a variety of circumstances, have been able to commit essentially all of my time and attention to learning them for the past several months. I'm trading live but using small enough amounts that a loss doesn't hurt me - and I've been at least somewhat profitable overall, with relatively small portfolio DD and volatility (which has surprised the hell out of me, given the standard "90% of traders lose within 90 days" cant.) It's been a hell of a trip so far, and I'm seriously committed to studying this fascinating stuff for the rest of my life; I'm starting in to update my (ancient) math and stats skills, and putting more hours into this than anything I recall since my teens. I'm deadly serious about getting good at it. The biggest challenge, though - as I'm sure you know - is figuring out how to reject/ignore the incredible amounts of noise and determine what signal actually means in this regard. The technical aspects of learning are, well, just work.

For now, my default premise (in the absence of enough knowledge/skill/reason for preferring a direction) is mean vol reversion: 1SD trades, taken when IV is high and skewed somewhat to deal with the overall positive drift. It's been working reasonably well, but I'm intent on getting more of a handle on it than that. The fact that successful traders exist, and are not one-off freaks of nature with inborn talent has convinced me that it's possible for me to get there - and the one bet I've always been willing to make is on myself being smart and capable enough to get to whatever goal I set for myself.

If price leaves the area where you’re getting favorable exposure, the trade is over. You can start a new, similar one but that’s beside the point regarding the first trade.

If you realized more vol than you sold over a period, or vice versa, nothing that you do after the fact is going to change that. You were on the losing side of the trade. Happens sometimes. Has no bearing on what comes next.

No need to over complicate this stuff. Past losses are in the past. Every day I look at my exposures and I see if I like them or not. If yes I will keep holding until something changes that. If not then I take the unfavorable parts off.

OK, I see what you're saying here. But the underlying premise would have to be a stronger belief about vol direction than I currently have - and my current skill set does not provide me with a basis for having one. I suppose neutral trades with lower deltas would be a proxy for making a trade "safer" in this regard, but... the pricing that far out makes the returns so low that buy-and-hold becomes a better strategy. I'm not seeing any daylight between the two.

Again, I'm willing to put in whatever amount of work is necessary to get this - but here, the challenge is knowing what to put the work into. For now, the crystal ball on that is still very, very murky.

 

[qlai]

I've been at least somewhat profitable overall, with relatively small portfolio DD and volatility (which has surprised the hell out of me, given the standard "90% of traders lose within 90 days" cant.)

I don't think these statistics apply to premium sellers. I'm curious why you chose this as something you want to pursue. Unless it's just a part of a larger plan that includes other strategies.

 

[destriero]

Just saw this, right after my previous reply.

Well, I did ask for perspective - can't complain if it's one that basically knocks my previous concepts into the trash bin, especially from a professional. This, of course, brings up more questions: are you saying that shorting wingspreads is such a bad strategy that it's never worth using? Or is it a matter of initial trade setup, like only setting them out at such a low delta that they should never get challenged?

(And, as a matter of keeping an eye on the ball: not my trade; I'm not defending it; I'm not even very interested in it per se. My total interest in this thread, as stated, is to start getting a clue about more advanced defensive strategies.)



Since I don't understand the adjustment, I certainly don't insist on it. Nor am I intent on repairing wingspreads - in fact, now that I've seen what you wrote, I'll be happy to avoid it... assuming I have some viable alternative that doesn't add up to "take a loss on all trades that aren't going according to plan." That's probably not what you're saying - but I don't know what the viable alternative is.



Been staring at this for a while, and - nope, I'm not getting most of it. I'm willing and able to work as hard as need be to figure it out, but some help in understanding it would go a long way.

"Managing risks from the outset" - are we talking hedging? Deltas outside 1SD? Setting stops at some acceptable loss ratio?

"Shorting stops" - can't parse that at all. Google doesn't have any examples of that kind of usage, either.

"Equidistant wing-strikes in SPX (not premium neutral) and DN-short futures" is the only part I think I've got, more or less - something like "build the trade in SPX so the wing strikes are the same number of strikes away from spot regardless of skew, and balance the delta with futures."

@destriero, I don't know if you can bridge the gap between your level of understanding and mine. But I sincerely appreciate your attempt to help.

I was referring to the guy from TastyTool adding flies inside the condor. It's not a hedge. He's adding risk. OK, so he can reduce the local delta pos, but he loses double outside the wings. I don't want to quibble about the actual PNL.

Long wing-spreads act as synthetic long puts and calls when traded with the underlying. Say you're trading XYZ and long the DOTM strangle. Long XYZ and the put = synthetic long call. Short XYZ and the call = synthetic long put. Or you're trading defined-risk as a futures trader with the long strangle. ATM condors (flies) are typically 1:1 risk so you're swapping risk for terminal performance, i.e., The prob of expiring outside the wings of the strangle may be 10%, but the risk may be 10:1 against.

And yeah, I am referring to the strangle and not the IC, but the principle is the same. The condor is simply there to define the risk.

I sell wing-spreads all the time, but against the underlying.

 

[BlueWaterSailor]

I don't think these statistics apply to premium sellers.

That's actually really interesting - I've never seen anyone make that distinction. But it's pleasantly encouraging.

I'm curious why you chose this as something you want to pursue. Unless it's just a part of a larger plan that includes other strategies.

I'll be honest: it's a personal bent much more than some sort of a planned strategy (although there's a fair amount of that, too.) I've been an independent for most of my life - being my own boss, and running a series of small but successful consulting businesses for many years. I made a change about five years ago, by going to work for high-end companies in the Big Data space; in some ways, it was great (terrific money and benefits), and in other ways, a huge mistake (an absolutely terrible fit for my personality that eventually came to feel like I was in prison.) It came to a point where the trade-offs were no longer tolerable for me.

So, right now, I'm in the process of going back to what lets me live at peace with myself - using my abilities, speed of learning, risk tolerance, etc. to earn a living while remaining as independent as possible in our highly-connected world. Trading, in my experience of it so far, aligns with that to a greater degree than anything else I've yet run across.

I'm not relying on it to make a living - as much as I would like for that to happen, I'm nowhere near skilled enough (yet) to lean on it to that degree. But it's a great fit for how I like to operate, and contains challenges that I find stimulating and motivating.