Thank you both for your message. Just to put you in perspective, I use 20% of my capitals in that options strategy account and only use 1/3 of it maximum per trade.
Good for you. But IMHO, 1/3 is a little much for each trade. Suggestion: Read up on Kelly criterion and use 1/2 Kelly for sizing each trade. Your risk of ruin probability would be a lot less. Regards,
Actually, I am using the Kelly% I have on my trade in order to choose the % of the bankroll I will use on that trade. If I am following you, you are saying I should be using 50% of that amount ?
Several issues: 1. Kelly is for optimized return for a fix win/loss and expectancy/probability, with infinite budget and large number of bets. For most of us, we make finite number of bets with a limited budget and so the outcome has large spreads. If during a bad streak with our limited budget we could get wipe out. 2. For trading, our win/loss and expectancy/probability are not a constants (in gambling it is) so our input to Kelly is at best a guess and is a moving target. If we are wrong on our estimates, we could be on the wrong side of Kelly before we know it and wipe out. 3.Even in gambling like blackjack, without a large number of bets and without a large budget, the empirical bet size is 1/4 to 1/3 Kelly: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2324852 I don't know if I make sense so experts please comment and help us out.
I'm new around here and just wandering about replying to a few threads here and there that are a little dated, so not sure if people still read these replies. Ironchef, in my own trading I've looked into Kelly position sizing and determined that a Fixed Dollar approach is far better in trading markets. Kelly sizing creates an exponential return profile over many, many trades (assuming positive expectancy) but suffers big drawdowns along the way. So it's ideal for gambling markets, featuring a very small edge, high volume of transactions and truely random, uncorrelated events so that the mathematical certainty of your edge allows you to keep betting through the big drawdown periods. In any sort of trading, you are normally getting bigger % gains per win anyway, so you don't need Kelly sizing to accelerate the compounding. Fixed dollar amount per trade will create a smoother, lower volitility equity curve which is what you need when you can't quantify your edge with the same certainty.
Sorry guys I was on vacations... Here are my option trades I placed for October and things are looking good again RUT Putt 1330/1335 0.25 @ 28 contracts for a possible profit of $700 SPX Putt 2335/2330 0.20 @ 23 contract for a possible profit of $460 AMZN Putt 895/890 0.50 @ 13 contracts for a possible profit of $650
If possible, could you provide an example of how you are using index options to hedge your credit spreads? I've been looking at various ways to hedge a long option portfolio. I realize that there is always a scenario where there's potential loss but I'm looking to reduce the ding down. I have a good understanding options (for a retail guy) so please don't spare the details. TIA.
Shoot me a pm about what strategy you're hedging and what you're looking to limit your loss to. I'd be more than happy to discuss ways I would hedge it, as well as discuss other options available. My journal (The Beerish Bull's Great Chronicle), its most recent post shows the closing trades on this, and the quoted post is the opening transaction. I'm hedging 5 credit spreads on individual equities by using about 8-10% of account capital with the SPX to hedge against the risk of an overnight systemic gap down of more than about 0.5% to limit weekly losses around 40% (super high risk / high return strategy). But there's a lot more to it than just that. When I get to my computer, I'll dig through my old posts because I get really detailed into the why and how of it. And for real, shoot me a pm. This is as much a learning opportunity for me as you.
We all ended up using our own version of Kelly, one that we, by trial and error, arrived at that fitted our trading style. My additional comments are as follows: 1. You are correct about optimizing return, and exponential return profile. For most of us, Kelly is just a guesstimate, and if we use full Kelly, we are too close to the edge and with limited number of trades, a wipe out is very possible. 2. So, most use 1/2 or 1/4 Kelly. Ed Thorpe himself famously stated that with 1/2 Kelly you got 3/4 of the return of full Kelly with much reduced risk of ruin. 3. The one issue with fixed dollar amount is you actually increase the risk of wipe out. Let's say your Kelly is .2 and you use .1 fixed amount. You could be out of business if you make 10 bad trades. Whereas with fraction you will reduce your bet size when you lose money and so could survive much longer. If you read lots of ET threads, you will find good traders intuitively reduced their size when the trades did not go his/her way. Best to you.