AMMO You said a mouthful there. I certainly agree that legging in, with a directional play is the way to go. The idea there are 3 trends a month was a good one, though I only play the idea of that in straight option buying, on the assumption there will be only, one or two. There probably could be in high VIX environment as many as four I suppose. I did not understand your Rule of Thumb last sentence though. Maybe you could explain that one? From my limited one year experience I kind of think, unless there is someway to actually use the rollover as a recovery from a threatened closed spread loss, I´ll skip credit spreads. That is the whole point I am watching Howard do his thing. The losses are just too huge to recover from is my experience. Assuming a $5000 account, a $1000 trade, a 3% credit. That is 20% of your capital at risk for a $30 return, not counting commission costs. Even if you closed a trade early, at the 20% loss point, you would be down $200. Which means you would need in that same month, a recovery of 7 rollovers each earning 3% to recover from a single loss by closing early. Assuming you were able to do that in Iron Condors, you would reduce your number of rollover trades to 4, maybe 3 to cover the cost of the loss of one losing early threatened trade. The odds are against you doing this successfully. Particularly in one 60 day period. Just my guessing here from my limited experience using weekly credit spreads and iron condors for 8 months, in which I lost my $25,000 of funny money wad twice before giving up.
falconview, You have successfully resurrected an idea I had in late summer but did not test. That is, rather than waiting to bail out on a spread once it reached 20% loss, to use PoT and roll the losing side. You have made it so much clearer that this avenue should be pursued with some testing. Thanks for your persistence.
Howard you are welcome! In the meantime the market is dead this morning and I have been teaching a trading apprentice on a 3 month learning tutorial to help me trade later this year.
20 JAN 2010 Trading Plan Opportunity - Takeoffs are optional Column: IC Spread #61 is unpaired. Opportunity to form an Iron Condor. Column: Spread P/L No roll opportunities Jeopardy - Landings are mandatory Column: Probability of Touching All spreads expiring tomorrow show less then 5% PoT. Overnight futures show little change expected. None the less these will be monitored near the end of trading today to make the final decision of closing them or letting them expire. Column: Days Until Expiration Six spreads are in their last day of trading. Column: At Risk P/L No caution indications. New Opportunity Weeklies become available today
My own thoughts on credit spread trading after a year of doing them. Is that they have a place in trading. The place though is limited. Essentially, credit spreads are directional plays and if you can forecast the direction that good, then you should probably trade short term options in a buying mode, as you make more money faster. The risk being roughly the same. The risk reward ratio in spread trading is lousy. The advantage if any is in trend following, probably intermediate and long term trends. Whereas straight buying of options is short term trend trading. Time Decay eats you up in buying, whereas in credit spreads you capitalize on TIME DECAY by selling it. Both trading methods require trend following forecasting to be successful. The iron condors are just a bit of icing on the cake, during low VIX environments in a bull trend. DARVAS and his step ladder trend following method is probably the most successful model that I know. With straight buying, because of the melting effect of time decay, they are mostly practical for short term trading. About three weeks in total, or preferably less. You can at least get out and control your loss if any. Picking your trading TIME FRAME is probably the most important facet of choosing which way you go. An alternative for longer trend following with buying options is to move to LEAP OPTIONS. I did this just once last year and it worked out great. That however, is not necessarily enough of a sample to decide to go that way. So LEAP OPTIONS and Credit Spreads are solutions to which type of trading you should do. For my money, straight buying is the better choice. The secrets in trading are loss control. Preferably a trading system of no losses at all. Even though it might mean just a few trades per year. The effect of compounding the size of your trades makes taking no losses and only a small series of sure winners, which puts you ahead of 99 % of the other retail traders out there, is my conclusion. You CAN do over a 100% ROI a year.
Still not clear how exactly you manage your landings. Still not clear when a potential takeoff is taken or ignored. Still not clear what to do exactly during a black swan, or what % move is considered a black swan.
Recheck this mornings trading plan. Under PoT I discuss today's landing. The first post on page 20 covers takeoffs in theory. As soon as quarantined funds are released we will do takeoffs in practice. After we get takeoffs under our belt I will post the risk analysis discussion which includes Black Swan events. Your patience will be rewarded.
I am unpersuaded by your analysis on several key points. Credit Spreads are directional plays but Iron Condors are not. Since nearly all spreads are paired shortly after they are entered we are in a non-directional environment. I prefer a non-directional posture because I don't think I'm good at predicting direction. Once an Iron Condor is formed, some excursion from zero delta will emerge. Iron Condors offer more than just icing (although I have myself referred to it as such). They are a critical part of risk management. Rolling has, in all but one circumstance, made my Iron Condor profitable, even though one of the spreads it contained was not. The risk reward ratio of a credit spread is not unlike many other directional plays. Just because the loss is capped does not mean that that is the expected loss. If you believe you can control risk by stops then I see no reason not to believe that risks can be controlled likewise with credit spreads. And the ratio moves continuously in my favor as I execute rolls. Some testing I have done indicates that the tools I use will accommodate higher volatility regimes. However this remains untested with real money. I can detect no difference in performance in the Iron Condors in play during the 1 down month, 1 sideways month and 3 up months that can be attributed to market direction. Picking the short strike is the most important element to success with these methods. The secret to success in all trading is loss control. No news there. The only difference with my methods is the additional tools one uses for this task.