How good your market neutral credit spread strategy ?

Discussion in 'Options' started by nell, Sep 20, 2008.

  1. nell

    nell

    Hi guys,

    I'm in my thirty right now, and wants about make living from trading. My previous work is self employed, I have some trading (the real trading) business - anyway, i have seen Stock trading is the best way and I focusing in this right now.

    I just want to know, who's using credit spread as their strategy month to month and compounding them ?

    I use Iron Condor, and use them for a nice whole year, until recently my accounts blew up :(

    It took my whole profit + 15% loss from my whole capital. It's around $20,000 loss up to now. Damn !!

    My Iron condor criteria, i always using probability of touching 90% (based on IV), if you using TOS - you will know that. Usually the range between strike price and current price is about 10% And target for 6%-10% profit only.

    Most of the time i let it expired worthless, because with my target only 6%-10% it hard for me to close it 10 days before expiration and else I already do a backtest, I calculate month to month highest close-lowest close and it rarely exceed 10% ranging.

    If it's close/touch to my strike price, most of the time i roll it down around 5% of the strike price to lower the loss. I never let it go below my strike price whatever the market issue is. And most of the time is works

    I usually trade with index RUT/SPX/NDX - and some IWM/SPY/QQQQ/DIA/DJX.

    I have a nice profit during 8-9 months and I compound it step by step, I think i already get around 50%-60% profit because of my compound. Yes, there's some lose, but entirely my portfolio was good, if I loss 1-2, i still win on the other.

    My blue print plan is, I know within 1 year - I will loss 1-3 times eventhough my Iron condor is high probability strategy, I already prepare to risk 30% of the margin of each stock, and based on my calculation - it still give profit for a whole year.

    But this month, i blew up - i only use half of my money, but I loss around 70%, it sucks man !! It's because panic selling (only in a week, most of index go down more than 10% and it makes me to close/roll down my put spread). Honestly, I put my emotion too that time, and let fear controlling me.

    The things right now, I'm about to make living from trading. But the time I want to start, my accounts blew up. I confuse right now, i decide to not trading anything from now. But who's paying for my living cost ?

    The best way is i trade again, but with my current mindset and my emotion i need time to gain more confidence and clear my mind.

    What is the best credit spread strategy that give consistent profit (eventhough it's small) with high probability ?
    What do i need to trading for living ? I know I must eliminate emotion and to be discipline, i already apply that.

    I have loss my confidence right now, but i still believe i can make living from trading

    What must i do right now ?
    I want to ask some advice with you guys, most of you more professional and more experience.I only need positive advice, please do not give any comments if you are only want to pick a fight and just to make me down. My future depends on this.

    I think i need input from you, especially those who already do trade for a living from your own pocket money (not a broker/fund manager/etc), I want to learn from you as I about to start.


    Hope get the best from you !!
     
  2. sugar

    sugar

    Hi Nell,
    this was a hard week in the markets. A lot of traders losing money, me too, but this is why God created risk management. We're yet playing the game.

    Only one question, my friend, which is your edge?
    I said that because selling far OTM IC is not an edge.

    Think about it and good luck.
     
  3. nell

    nell

    what edge ?

    sorry my ignorance but i don't catch your question

    I'm selling very far OTM because i interested with the high probability ratio.

    Do you try to back test before ?

    You can try RUT, back test from the beginning the stock came up (I think it's begin from 1987)

    Check how often RUT ranging exceed 10%, I calculate from the highest to lowest price that month, and it's very rare (if the economy not have any crush). Especially 2003 to 2007, if i start that time - i already make money not only for living, but for others living too :)

    That's why i prefer very far OTM rather than only 1 SD (Standard Deviation), the key is to catch if the market boom right now, we get out of the trade (like 911 and now), if we can avoid it, we can make 6-10% and compound it every time.

    Also with this big probability ratio, it easier for us to compound it. For me I rather have little profit but i compound it, than have big profit and cannot compound it.

    But right now, I cannot catch it, i still in the game when there's boom.

    Any comments ?
     
  4. Since you are talking about the success rate of your trades it means you expect some of you trades to fail. Losses are unavoidable. Even with 90% probability of success 10% of your trades are expected to lose money. Maybe the key is to pay more attention to the correct money management not the market timing. For example stop compounding your profits so often.
     
  5. sugar

    sugar

    Maybe the question here is not the lesser probability of losses but the big size of this loses overcoming your previous success. Learn to manage your risk position.

    I agree with you, an edge is an exploitable statistical advantage, but when you understand OTM IC like an edge you're saying that market makers models are wrong and you are right.

    Be care about it (it seems too arrogant ;) ) and your trading account will appreciate it.

    Regards.
     
  6. nell

    nell

    Thx for the comments, losses is unavoidable, i agree with that.

    But we can arrange to have small losses, right ?

    Regarding money management, since we're a premium seller, it's easy though, just remember do not put in one basket. I have separate it to 5-6 index ETF, but all market neutral strategy (iron condor).

    So I think compounding not a problem with my losses.

    I still find out, how can i be better trader later on
     
  7. nell

    nell

    Sugar, I like your comments

    Can you explain more detail ? so what should i do ? Statistically and technically it's high probability ratio

    But i like your words mentioning with saying market makers are wrong and i'm right.

    I remember once, most of the premium sellers said, actually market makers doing the same thing as we are (like in casino, market maker is the dealer and player always lose, because players always buying and dealer always losing)

    I want to ask you guys, is this really true ? I have heard there's several hedgefunds also doing only selling premium options like this too.

    So if most of market makers is sellers, than it makes me move at the same path with market maker, right ?

    and statistically as i remember 90% of options is expired worthless or closed before expired, right ?
     
  8. sugar

    sugar

    About options strategies with high probability ratio:

    A lot of floor traders, especially the younger ones, love to write naked options. "The fools," they say, speaking of the options buyer, “they just keep giving me their money, and I keep selling 'em options that end up expiring worthless." For 11 months of the year, they, can report a 90 percent success rate writing options, but in the last month, seemingly out of nowhere, the market moves 10 percent and they find themselves shelling out a lot more money than they had made, or even going completely broke.

    Victor Sperandeo in Principles of Professional Speculation, 1994
     
  9. dmo

    dmo

    As always, the devil is in the details.

    I have a friend who is a pretty seasoned professional trader and manages money. He will sell premium if he thinks it's appropriate and when he does, he's a pretty big premium seller - but very picky. Usually he will start selling S&P 500 premium when the vix hits 25 or 26.

    The last two weeks though were an exception. He didn't start shorting premium when the vix hit 25, or 30, or even 40. Some sixth sense spooked him this time, and he stayed out.

    So are you "moving at the same path as long-surviving professionals" by being a premium seller? Only if you have the same sixth sense that has kept that small and select group alive.

    And as good as he has been, the final chapter has not yet been written for my friend, or for any of the current crop of premium sellers. They all live one mistake - one lapse in judgment - away from blowing out.
     
  10. caroy

    caroy

    Over the last year I've become a premium seller of ag and soft options. I've only been doing this strategy for 18 months or so.

    I aim to make 5% a month and diversify that option selling by shorting off setting puts and calls in highly correlated markets.

    I calendar spread to help control the risk and roll the positions forward if fundamentals remain appropriate as the lead month option nears expiration and the delta of that option approaches zero.

    I exit when the lead month option reaches at the money. So far i've had only a couple losing trades that were manageable and have not effected my 5% target for each month. I only use a small percentage of my funds and keep a large amount available to cover the margin requirements if something historic happens: ie gold run up and the corn run up of june july.

    so far so good. I have a few partners who trade a similar strategy but in my opinion over leverage their accounts and are more suseptible to the blow out.

    I realize the risks of premium selling and try to manage them to avoid the blowout scenario. In general my trading is very boring but so far its compounded nicely. By having my strict exit rules i hope to avoid the blow out scenario. But rules are always easier stated than followed.
     
    #10     Sep 20, 2008