What is the edge in your trade?

F

ffs1001

Someone posed an interesting question in another thread :
" I haven't seen anyone as yet explain to me in layman's terms what their edge is conceptually. "
which got me thinking "What is the edge in my trades?". I must admit, it really made me focus.

During certain months of the year I trade a lot of earnings calendars on various stocks, and it's been working out pretty good for around 3 years. So, what is my edge in this? It's theta decay. And here's how I like to see it:

Imagine I give you an ice cube and I have two cubes myself, all cubes being the same shape and size and we're in a room where the temp is constant throughout. I bet you money that your one will melt to completion much faster than my two.

Scenario 1) You put yours on a plate and I put mine on two separate plates separated by at least a foot. Result - all three cubes melt in the same time. No win for me.
Scenario 2) You put yours on a plate and I put mine two on top of each other. Result - voila! Yours melts faster than my combined two, cos they are keeping each other cooler.

Have I created an edge? I think so.

So, applying this to calendars : I give you $100 (an ice cube) and I have $200 (two cubes). You buy a Put priced at $1 expiring in 7 days. I can either buy two of these (place my cubes in two plates), OR, I choose to buy a Put which expires in 14 days time but which is priced at $2. All other things being constant, we all know which Put will melt away faster.

So, for calendars, I can see easily what my edge is. But for many other trades, it's a little more complicated. Sometimes, my edge comes from volatility, and sometimes it comes from the delta (for directional trades). Sometimes, I enter a trade thinking it's going to be winner because of theta, but volatility becomes the hero.
Sometimes, I cannot even easily explain where the edge comes from.

So, isn't all edge for retail traders coming from theta/volatility/delta? (Barring insider information, or ability to purchase options at a lower than market value due to some technical advantage etc etc.)

Just curious to see what others think.
 
ffs1001 said:
Someone posed an interesting question in another thread :
" I haven't seen anyone as yet explain to me in layman's terms what their edge is conceptually. "
which got me thinking "What is the edge in my trades?". I must admit, it really made me focus.
More...

You're on the right track, sort of.

You can have an edge over other players by being informed, smart, and disciplined. But that's the same as having and edge over the market.

Bottom line... there is no edge over the market for you that is legal.

Don't waste your time with considerations of "edge", regardless of what others say.
 
Here is 1 edge. Buy and hold (seriously). market tends to go up a lot more and often than down. I ran numerous back test on various models on ES, and longs are a lot easier to design than shorts.

Of course HFT have technology edge and reg NMS, though the space is extremely crowded now and they cannibalize each other.
 
Asked the future of the stock market JP Morgan replied I believe the market is going to fluctuate.

That's a Wall Street classic.:cool:
 
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A professional trader has developed methodology (ies) which under defined technical conditions give him or her some combination of knowing what price is likely to do next (not WHAT it will do next, nobody knows that) and or that the signal will yield more profit if it works than it will lose if it doesn't. That expectation is supported with a trade plan and it's disciplines and the character to follow those disciplines.....That's the edge...knowing how to trade. Lacking that, there are forums such as these where people can come and opine how there is no such thing as an edge, markets are purely random, markets are rigged, HFT has ruined trading, retail has no chance against the institutions, the boogie man will get you etc etc....you either do the work, both technical and personally and learn to trade or you don't.
 
As retail/semi-retail, we have three sources of edge (should we choose to use them).

1) Size: (or rather, lack of it)... we are small enough to be able to enter/exit markets without triggering price movement, most of the time. Large funds may take a month to do what we might accomplish in a 6.5 hour trading day (or even with a single click).

2) Position/Risk Management: we enter/exit positions because we seek capital advantage, not because we are required by non-market constraints to have so-much-% employed for this and so-much-other-% employed for that. BIG advantage. We can simply NOT trade! Or Max out!

3) Adroitness: Really, just Size+RiskMgt -- we can hear something, see something, read something, invent something... and act on it to inform our trades *perhaps* faster/better than an algo or a cubicle-encased trader. Anybody price milk lately? What does that portend to the shaky {feedcorn} harvest? 24 hours *after* you figure that out, Wall St. will know that, too.

Be nimble!
 
RedDuke said:
Here is 1 edge. Buy and hold (seriously). market tends to go up a lot more and often than down. I ran numerous back test on various models on ES, and longs are a lot easier to design than shorts.

Of course HFT have technology edge and reg NMS, though the space is extremely crowded now and they cannibalize each other.
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%%
That +other edges exist. UPRO used to pay a better dividend........................................................I would not say the market is rigged against a better dividend but that's the way some whine LOL:D:D, :D:D:D:D:cool::cool:
 
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