HD, Mav, first, I have to say that it is nice to see two good traders like you guys, discussing basic issues. I think either of you present different trader`s personality, but both of you show very high level of knowledge in subject of, so called, option trading. While my trading style is closer to HD`s style I can understand very well the comfort of such trading. On other hand I always look for new ideas and I believe that Maverick`s experience is the knowledge which most of us (at least those who can understand and visualize trading) would like to have. While we know what we know at this point, let`s better try to find common field to compare our experience. I have few concerns about Maverick`s strategies. One of them is: how many of them you use Mav, and do you have to use many of them (strategies) to make consistent profits ?
Chris, Sorry I didn't see your question. The key is not in how many strategies you use at one time but rather make sure you have enough positions on. For example, pick one strategy that you like and that you understand and spread the risk out over at least 5 to 10 positions. Obviously if you have the capital even 40 to 50 positions would be even better. It doesn't make any sense for you to try to use strategies that you feel uncomfortable or that you don't completely understand the risks involved. Consistent profits come from making each position a small % of your overall portfolio. Think of it this way, the more positions, the less volatility, the fewer positions, the more volatility.
Mav, As I said before, in previous trader`s life I was a system trader thus diversification was a matter of life and death to me for loooong time. That`s why I asked about statistical accuracy of your breakout strategies, because my experience showed that most of them present many great moves pumping trader`s pressure and rising expectations, but statistical probability of catching such trade is too low to get outstanding results, so finally the performance is actually less impressive than in a case of boring, low risk strategies making little by little through the time. Also Money Management of low risk strategies is much easier and increases the risk gradually, instead of jumping up and down. I know there are many profitable approaches to this, and one of them is what HD trades, so I just wanted to compare trading breakouts vs. ranges using efficient option strategies. If necessary, I can share my % results.
Chris, Which particular strategy are you referring to? I have mentioned many on these threads. Most of my strategies are not breakout plays, in fact, quite the opposite, however, they are structured so that if there is a breakout, I like to have unlimited profit potential. Also my my strategies are spreads and I very rarely make directional bets. In fact never is probably more like it, however, that is only when I put on the position, once the stock moves and I have a good feel for it, I am very prone to letting my deltas run. I am a very risk averse person, maybe too much so. So most of my plays are very safe and very conservative with the occasional home run. And Like I have mentioned before, the key is putting on as many plays as you can. The more plays you do you not only decrease your risk, but increase the probability of getting that big play.
Gentlemen, Just a note on the value of diversification from my humble perspective. I agree that it is certainly ideal to diversify one's risks across a large number of positions. However, though I know Maverick was not suggesting otherwise, it should be said that one must be careful not to diversify into ill-advised trades just for the sake of diversification (I believe some refer to that as "diworsification"). Personally, I prefer to wait for only those set-ups that have a positive expectancy using a limited number of both strategies and markets with which I am comfortable and feel I "know" well. I will then look for other trades to hedge the risks of those positions without diluting the original positions' profit potential (i.e. positions to hedge the gamma risk of iron condors). A related point concerns position management. I don't know about the rest of you, but as an independent trader without a team behind me, I've found it rather difficult to effectively manage more than a relative handful of positions at any one time. I think this is more pronounced with options than, say, equities or futures, given the vast array of potential position adjustments available. By contrast, an equity or futures trade. once established, requires far fewer decisions than does an options trade. Indeed, the process can be largely automated in the case of equities/futures, whereas the same cannot be said for options. Again, while Mav and others may have a different view, for what it's worth, I believe that a relatively narrow focus on a manageable number of strategies, markets and positions that the trader fully understands and with which s/he is comfortable is among the keys to success in options trading. At least that's been my experience; so it's entirely possible that these limitations may apply only to me. HD
HD, I agree with what you said. Diversifying is great but not just for the sake of diversification. However I have noticed there are so many great trades out there I couldn't possibly put them all on. I have never had a shortage of trades to find with great edge. Also something else to add here, I know it looks intimidating to have a lot of positions and seems like a daunting task to try to manage them all but I can assure it looks harder then it really is. It's actually pretty easy. I'm not talking about 100 positions here, but 5 to 10. In fact even with 10 positions I find myself pretty bored most of the time hardly making any adjustments. I agree also, stick to the strategies you know you can execute. What good is it you put on a ton of butterflies but have no idea how to trade them. I will say this though for what it is worth. Your probability of ever getting a homerun trade and I am talking about a trade that could set you up for life, will be very small if you just put on one or two positions at a time. The more positions you can manage, the higher the possibility of catching some great stuff. If you talk to MM's on the floor, they will tell you that most of the year they make small money but one or two good trades will make their whole year. If they miss those trades they tend to do very poorly on the year. Poorly being a relative term here. Of course I realize you are not shooting for homeruns but that's no reason turn them down when they are available. LOL.
Mav, I was mostly talking about short calendars, but additionally referring to few others. But let`s use it as an example: how do you get unlimited profit potential trading calendar shorts ? If you scalp gamma to rent vega for free (as you wrote) you fade the moves by trading against the market, right ? So, once you get breakout how do you profit then ? If by changing the rules and staying long delta then it is pure speculation. On other hand if you stay neutral then the profit is not unlimited ?
ChrisM: Check out the thread: "The perfect option position " in this forum, we discussed a position like that there .. Tiki
Mav, Thanks for the reply. Yes, even I, with my aforementioned limitations, can handle 5-10 positions at a time. I was under the impression that you meant a lot more than that. My apologies. Plus, though, as I've said, I focus on trying to consistently hit singles or doubles with my trades, I would certainly not be averse to hitting the occassional homerun should the opportunity present itself. If I recall, even Wade Boggs hit a few in his day (sorry, but I was more of a Mattingly fan at the time). So I will revisit this in the trading plan. Who knows, perhaps there might even be a way of combining the gamma hedges I've been working on with the type of explosion positions that could make the difference between a career as a light hitting journeyman infielder and one as a steroid-enfused home run bashing future Hall of Famer! HD