All I'll say is this. You should be very happy. Most guys when they learn that lesson don't live to trade another day. And your right, you probably won't make any more money by spreading your bets out but it will keep you in the game. And that is what's important.
HD, sorry for delay in answering but I did not want to response too quickly. Now I can see whole picture from the distance, so this is the time to say something. You are now watching the same market action as I am - which is correction. You have bought back your 530 call for more what was paid and you still don`t know whether your 540 call will make enough money to pay the difference - right ? But even if the market keeps moving up it does not mean too much. Indices usually moves in channels, and by watching S&P100 you may see that any correction can hit 530-520 level. What happens then ? But let`s assume that trend is strong and keeps moving - how many times a year such situation takes place ? Sorry if it sounds sarcastic but there is no such intention. So far most money made in trading by myself came from corrections in indices, that`s why it is hard for me to believe that completely opposite approach can be profitable in long term run.
Chris, I don't disagree with you and I have no intention of changing my strategy to go gamma pos or directional on the indices. Iron condors on the SPX will remain a staple of my overall trading approach, though I may cut back on the number of contracts per position going forward as I diversify into more dispersion-type plays on individual names. The lesson that I took away from this week's experience relates to position management and risk control. I concur that the indices trade in ranges most of the time and, thus, if one is reasonably good at identifying S/R levels, these positions should work most of the time. However, as this week has shown, there are periods when the market will move further and faster than may have been anticipated, and that is when one must be especially vigilant when short lots of gamma. Hence, while I agree on the need to let these positions run their course, under certain circumstances, one should be prepared to adjust before a break-even condition or moderate loss becomes a substantial loss. That's why I think one needs to formulate and stick to a pre-defined exit strategy before initiating the trade. For as bad as I felt Monday after buying back the short calls for more than I could have a couple hours later, I would have felt a heckuva lot worse had I done nothing and let the trade run its course to maximum loss. HD
HD, thank you for interesting discussion. I agree that you should be prepared for adjusting your position but my belief is that other strategies you have used before were more flexible in long term run. I mean long OTM QQQ for example. Also, you have mentioned recently about using long/short LEAPs - sounds interesting. Did you find this technique more efficient ? While I believe (and at this point I am definitely on your side) that non-trending approach is more appropriate for trading indices, I am still working on many possibilities of covering, or at least fading possible losses. So far such simple techniques as CovCalls seems to be quite useful for this. Also, I still like flies and dual flies due to reward/risk ratio and adjustments opportunities. Good trading
Chris, I'm still constructing the long/short leaps portfolio, but at this point its too early to tell whether it will work. So far, since I started this in October, virtually all the longs (i.e. AIG, PFE, VIA, XOM, GE) have done reasonably well, while most of the shorts (i.e. BA, MO, EK, TXN) haven't. Whether that's a function of the market or my stock picking prowess (or lack thereof) is unclear. What seems to be clear, however, is that the correlation between the basket and the OEX/SPX is iffy and thus the hedge is imperfect. Thus, though the strategy, or more generally a long/short swing (3-6 weeks) or position trading strategy using options (as opposed to stock) may have merit on its own, I'm having some doubts as to whether it will serve its original intended purpose (particularly if vol remains low as I suspect it might). As far as a more effective hedge, I've come to the conclusion that the ES is the better way to go. Its certainly superior to being long QQQ options after having tried it. The only problem I have hedging with the ES is somewhat idiosyncratic in that it would require me to trade differently than I have in the past. Specifically, I virtually always fade the market, selling into strength and buying weakness. That's how I put on the sides of my iron condors, for example. However, hedging iron condors with the ES would require me to buy strength and sell weakness to neutralize the increasingly short or long deltas of the IC's. That's something I'll need to get used to. So this remains a work in progress. Perhaps once the hedging strategy is fully developed, I won't need to concern myself with the gamma exposure. But until then, I'll keep an eye fixed on the exit door via an adjustment or a liquidation of the position should the market again accelerate towards one of the short strikes. HD
HD, after reviewing few possibilities I find conversions into Long Condor or Fly relatively the best, confronting indices behavior profile. The other techniques were: long OTM vertical Call spread combined with short Put Spread, short naked OTM Put (risky, but worth consideration), Long Call Backspread (might work better in Nasdaq, but not S&P). Still believe that simple long ATM QQQ is pretty good technique, especially if you apply little AT (buying them on average down corrections). However, I have to say that Nasdaq might be much better instrument for doing this if you may consider giving up of little part of comfort for adjustments techniques (moving two wings little closer to each other and buying back shorts during market`s corrections). While this one needs a lot of experience and discipline, my belief is that such strategy is almost impossible to compute in any available trading software and thus may provide quite impressive edge. Also, these techniques might sound more friendly to you, while they require acting against the crowd. I personally hate to follow the public. After years of trading I am not comfortable with this any longer. Regards,
Chris, Yes, converting to a long butterfly/condor is my preferred adjustment as well. Knowing when and whether to make the adjustment is the hard part. Your idea about actively trading wingspreads on the QQQs though is interesting. I'll certainly look into it. On another note, now that '03, the year of the volatility crush, is coming to a close, what's say we bring this thread back to square one and discuss some long timespread and other low risk positive vega ideas, such as backspreads? Anyone care to share some thoughts on preferred vega pos strategies based on experience? HD
HD, so far I have been using three techniques: CovCalls, Backspreads and short OTM naked Puts (this last one combined with some AT, so it is more like trading system using options instead of buying underlying). It works like this: CovCalls are nice to cover possible losses for non-trending flies and ICs if you open them early, so then you can accept larger moves down. Again, QQQs are better as well as Nasdaq. Backspreads rarely gives profits but the are relatively easy to close without any losses if you start about two weeks before expiration. Naked Puts work pretty well even in non trending markets, as long as you open them far enough from the market and you know when to buy them back assuring appropriate reward/risk ratio versus probability of such action. For backspreads Nasdaq and QQQs are better, but there is no straight correlation btw Qs and S&P, however we are talking about large moves here, so it is almost impossible to watch S&P moving up with Nasdaq sitting still. What is more, I would expect Nasdaq moving up soon if this breakout in S&P is the beginning of large move. Obviously IMHO.
Excellent Thread. But not sure whether I understood correctly: "long calendar is not a good way to earn theta, and there are better way to earn theta, such as butterfly, condor and iron condor" Am I right?