Not adjusting is one way to trade, as long as it fits your comfort zone. But if commissions are ever a factor, you are using the wrong broker. Today, commissions should be insignificant. Yes, IC cannot win every month. But the key to success is giving back less than you earn. If your stop loss works that way, then it should be ok over time. Mark
I don't know what broker you use, or if you are member of an exchange or Prop Group with special deals, but it seems to me that commissions and bid-ask spreads (execution costs) are a huge % of the bottom line for retail traders, especially for ICs that are adjusted frequently. Feel free to throw in your numbers, as I think I could learn a lot more about this strategy from experienced users. At this point, I can only see possible "edge" in (with possible being the key operating word here): 1-Proper adjusting with some type of timing method for either price or Implied Volatility or both. 2-Lowering execution costs to the bare minimum. (Exchange member commissions and fees via a proprietary trading group that owns seats in several exchanges or something). 3-Instrument selection for the execution of "what I need to do right now", as prices for very similar instruments always seem to have some skew in one direction or another: For example OEX puts could be slightly skewed in the bid-ask spread Vs SPX puts, or SPY puts, etc. I.e.: One instrument will have the best bid, and another instrument will have the best ask, at the moment I must do something like adjusting or whatever. Commissions and bid-ask spreads for options have always deterred me as they always looked "too high" as a % of the transaction. Please discuss. JW
In a way you are right. My size in options is currently zero, as I have not been able to convince myself that I have an edge. Working on it. Thanks for input. JW
IMO... As a trading vehicle, Options are the only "edge" I need. I no longer trade underlying issues directly because of the linear relationship of my P/L to the underlying price movement. I'd rather construct option positions that can produce a decent profit while being resilient enough to withstand reasonable adverse underlying price moves against my positions, thus giving me the opportunity to adjust or exit my position with minimal loss. But in all cases there is a Risk. So, if the "Edge" you refer to is to eliminate risk then you will never want to pull the trigger and put on a position. Mech
Correct me if I am wrong, when you setup a position that been "resilient" to the loss, this normally also translate into the meaning that postion also has "resilient" to the profit .. We always have a double edge sword .
I describe "edge" as a very defined advantage with a defined positive expected value in the long run, and also with a certain maximum defined standard deviation of returns over the long run (risk of ruin?). I'm glad you have found your "edge" trading options and I would be even gladder if you chose to describe it in detail. If you cannot or will not describe it in detail, I understand that too. Thanks for input. JW
It is interesting that your emphasis on my post was "resilient to loss". While I include "loss" in the evaluation in my trades, I focus equally on "resilience to profit erosion". That may seem like splitting hairs, but both objectives are important to me. Most of my 'bread and butter' option strategies can easily achieve their "expected" profit potential (or more) while giving the underlying plenty of room to move in an undesirable direction, ie. IC's, Ratio Spreads, etc. Any serious option trader should know the profit parameters (or graph) of any trade in advance, and those parameters will normally evaluate the preservation of the profit potential even with reasonable adverse moves in the underlying. So "resilience to profit" is not a fair assessment of what I was trying to say. Mech
A comment on resilience to loss vs. profit-- they are not opposites. An IC position can have a high probability of profit, and if it does, it will also have a low probability of loss, which is directly related to that same probability (but these do not quite add up to 100% due to slippage and commissions). The dangerous thing is that an IC has a small chance at a catastrophic loss which must be avoided in order to successfully trade them. What I try to do is adjust to keep the delta relatively balanced and I have also been using insurance spreads to help balance the position as well as give a modest chance at a windfall profit. This means that I can have a position with a high probability of a modest profit, a small chance at a very strong profit, and a low chance of a disaster, which can be adjusted away from under most conditions. If things are looking really scary, I don't pretend that a profit can be made in every situation. I will limit my losses to something in the order of 2-3X my original credits. More than that will wreck the profitability for many months and create psychological pressure to take foolish risks in order to "make up the losses". As I monitor the position, I take the opportunity to spend some of my credits to buy cheap insurance spreads whenever it makes sense to do so. Sometimes, I will use a little reversion to the mean thinking and buy some options against the trend if the options seem really cheap. It's often surprising what a 25 cent spread can do for you if the market suddenly reverses!!
So what kind of % total net returns on your accounts did you guys make this last expiration month?. How does that compare with the average returns you guys expect to make over a large number of months?. I know everyone trades differently, so I'm not asking for specific numbers, but percentages, to see how widespread the results have been. I'm kind of stuck with the idea of the need for some type of timing method (price or volatility or both) to make adjustments and the absolute need to keep transaction costs minimal, to realize a positive expected value over time. (And being always net short volatility to gain the time decay edge). Please all feel free to comment, and thanks in advance. JW