You haven't been doing this for any length of time, have you? (If you don't know which sentence brought that on, you really need to just close up shop) Also, re the other comment: the guys bringing up stuff here (and I am not speaking for myself) ain't amateurs, not by a long shot. I make fun of this place a lot in other forums, but there's a small group of posters who you know are the real thing. For better or worse, a significant plurality of the ones everyone knows know options are here. Only one of them is at all sympathetic to you. Unless your ego is massive, that should at least make you stop and think. If your ego is that large, well, a fool and his money generally don't end up with a lifetime relationship. If you think you can beat those odds, feel free to try. Me, I'm done here.
there are so many things wrong with this statement. 1) If you buy the stock at $100, your max at risk is $100 and the stock needs to goto $0 for you to lose it all. If you sell otm spread/ic say at $7 credit and max risk of $100. Yes your max loss remains the same as the stock except now the stock only needs to move 10-20% not 100% for you to reach max loss. On the flip side, if you want the risk to remain the same as stock 20% move = $20 loss instead of $100, you need to write a much smaller position (premium received) which kind defeats the whole purpose of this exercise, as the return will be close to treasury. 2) Stock exit you will have much narrower slippage and stop loss works. Ever try to exit an option spread as the market gaps down? anyone will tell you stop loss orders are useless for options. If you set a stop loss order to exit at market at 20% of max loss, you will get papercut to death on a violent day. Basically you are betting the market remains flat long enough for you to earn enough premium before shit hits the fan and your crazy risk:reward losses start to happen. That's not a good way to start a trading career. I guess it's pointless, he wont listen until experienced first hand. ps: lenny dystra is a piece of shit, he didnt have those winning streak, he simply rolled those losers onward, then eventually flat out deleted them from his record. I got into option because a coworker recommended him to me when he was on thestreet.com /sigh thank god i found et soon afterwards.
Well the stock can move anywhere past 110 and you still make money and the farther it goes the more you make. With the spread it has to stay within a $10 range and in order for you to make the $50 it has to stay there for the duration of the contract (30/45/etc. days) due to the fact that the spread makes money from theta. You also have vega (usually) working against you. Thus the two examples aren't the same.
Look Howard, you see your realized p/l results right now and you feel like Charlie Sheen..."WINNING". And this has only been a couple months. There were also a lot of guys who were winning for years from '03/'04 to the crash who thought otm credit spreads were an edge, but it only took a couple weeks and the unexpected for them to get slapped in the face. Just going to wish you the best and hope you don't give it back. Perhaps with more experience and some unrealized drawdowns (hopefully they bounce back) you'll move on to other spreads, preferably at the money. And it can't be reiterated enough but as atticus said you should sell atm and buy the wings. YOU GOT TO GIVE YOURSELF SOME ROOM TO MANEUVER. Selling otm, your like strapping yourself into a hotrod, straight line, go. You might make it down the track most of the time, but if you ever veer off course (have you ever seen the unrealized p/l curve when that thing is going against you? roflcopter) then you are just going to come in last, first. At least give yourself some room to maneuver like in NASCAR or F1, stay in the race long enough and you might come out with a huge win like Trevor Bayne 2 weekends ago (kind of like the R:R on an atm butterfly).
Nothing in your post explains why trading iron condors requires Black Scholes to be correct. There are any number of other pricing models that assume fatter tails than lognormal, and if options are priced according to accurate assumptions an iron condor will have zero expectation. Yes, once in a while you will get wiped out. But in between you make enough to pay for the occasional blow up. Typical iron conder statistics: win $500 19 times in a row, lose $9500, win $500 19 times in a row, lose $9500. The expected return is 0. If you believe that far OTM options are still under priced, despite the volatility smirk, then buy them. If you are wrong and options are instead priced correctly your payoff will look like this: lose $500 19 times in a row, win $9500, lose $500 19 times in a row, win $9500, etc. Again, this is a 0 expectation strategy-- it doesn't have the dramatic drop offs on the P&L curve that iron condors do but it's just as lacking in positive expectation. (Of course, allowing for the bid/ask spreads and commissions both strategies will lose money in the long run.) Your one big win with the Lehman strangle no more shows that long strangles are a winning strategy than the fact that Howard has made a good deal of money selling hundreds of credit spreads shows that he has a winning strategy. Atticus' gripe is that Howard has not demonstrated that he has an edge, i.e., positive expectation. It is in the nature of selling credit spreads that you can have a long string of wins that makes it look as though you have an edge, when in fact you just haven't rolled the snake eyes yet that wipe you out. But this has nothing to do with whether BS is correct. Even if the lognormal distribution of prices was correct and BS was used to price options iron condors would still blow up often enough to give you 0 expectation.
Belittling a student is never a good pedagogy and not to be respected. Your post shows little evidence that you have read anything about my risk management methods. Some of your posts have been useful to me, and I will miss that. I never miss posts consisting of all attitude with zero added value.
It is difficult to focus on content when the presenter starts out his exposition with an insult. I would not recommend this approach to others. Suppose you were about to do your boss a solid and warn him that something he was doing was dangerous. Would you start out by calling him clueless. I think not. The purpose of the thought experiment was to illustrate the use of a stop loss with a similar risk/reward profile as used as a premise by others. Nothing more. Nothing less. The speed of moves is only tangentially relevant. Like those who trade minute bars, hour bars, daily bars, etc. Reaction time is the key element, not the risk management method. Your premise is demonstrably false. Therefore your conclusions, right or wrong, must be suspect. Executing a market order as a stop loss has several deficiencies. However, you will have difficulty convincing many that it is likely to slip a 20% lost to a 100% loss. If you read my risk analysis you will note that although I trigger at 20%. I use 30% in my calculations to account for slippage. Ending a presentation in the same unfortunate manner you began it is also just as counterproductive. Your last paragraph contains nothing useful that I can discern unless you are trying to suggest that I am doing likewise. If this is the case you might cite the evidence to support that belief. Or you might take up my challenge to view my account on a transaction by transaction basis.
Did you mean that or did you mean to reference an IC? The purpose of the thought experiment was to illustrate the use of a stop loss with a similar risk/reward profile as used as a premise by others. Nothing more. Nothing less.
Why do you believe that a wipe out is the other side of your binary choices? Testing experience indicates otherwise. Testing has its limitations, but I find it hard to conclude that this dichotomy is one of them.
You kibitzers. You obviously are not going to teach Howard anything. Let him be. You can´t convince a guy who is winning right now, that sooner or later he will blow up. Las Vegas is full of examples. For me, I´m through with credit spreads and Iron Condors. I think you can make more money on TWO YEAR LEAP OPTIONS and safer too, using stocks. As an amateur, not too versed in the technical jargon, what I like are TRICKS. Some little trick, which ATTICUS describes as an EDGE, that makes you win EVERY TIME, or do not trade. Now I´m open to learning some TRICKS if anyone has any they would like to send me privately.