But I think that makes sense. A newbie cannot make money unless they know what they are trading and all the nuances. A academic who spends all their time with their head in the theoretical cloud is very unlikley going to make money because they lack most of the practical skills necessary.
thank-you coach for the excellent reply. again, if anyone else has repeatedly used partial hedges or done any analysis; i would be interested in hearing your thoughts. being a month away from year end after having a great year, i am increasingly thinking about these things....
Sorry, I can't see how you can create positive expectancy when "closing out the policy" when the conditions are not right. If that is correct, then you can use the same rules to open new positions with positive expectancy right from the start. This argument that you can create positive expectancy from an initial zero or negative expectancy trade is weak.
Maybe my choice of word is not the best, but the point I was trying to make is that you need a trading approach that creates positive expectancy, you can't just blindly sell and expect to make money.
Check out Dan Sheridan's webcast on the IC. He talks about a "mickey mouse ear" (which is how his suggested hedge looks on the risk profile curve) on a hypothetical bull put. I don't have time to get the link, but just Google his name with the word CBOE. Basically he is hedging a SPX bull put spread with a SPX bear put spread with the short of the hedge at the long strike of the credit spread. Example: STO 10 - 1300/1275 bull put BTO 2 - 1325/1275 bear put Buying a corresponding SPY hedge would do the same thing. Initially, I thought the advantage to using the SPX versus the SPY is that I could plot the two positions together nicely in ToS and see the resulting risk profile. I posted on this back in August/September time frame and if I recall correctly someone (Mo?) responded that a SPX credit spread with a SPY debit hedge could be plotted in ToS with the SPX price on the x-axis. One thing I like about plotting the "mickey mouse ear" is that it looks like you can relax the 15 point adjustment rule of thumb somewhat. As your short is approached, the at-expiration profit actually ramps up on the risk profile curve. I think this could be useful if this happens to your vertical credit spread near expiration (when adjustments are typically more difficult). The at-expiration ramp up is similar to a diagonal, but has less hedging power.
You cannot create positive expectancy once a position has run against you. Offseting a bad spread isnt creating positive expectancy. Some like to call this risk management but it does nothing to add expectancy. Positive expectancy is created once your position PnL is positive(after favorable delta/vega movement) and you make an adjustment to lock in any gains. Your expectancy will be equal to the gains you could've realized had you offset the position instead minus any part of it you put at risk for adjusting your reward. Everything else has negative expectancy at the outset under random distro. And unless you have alot of experience trading similar instruments/setups over and over again, you will probably not be able to vary your position sizing well enough to add expectancy either. So where does all that leave one? Well, back to the basics, being able to call direction or vega or lack there of and execute trades accordingly. As long as risk/reward is kept in check, mainly by avoiding the sale of cheap gamma, it isnt all that difficult for someone who has a a good understanding of options to add expectancy to their trades. Note i said add expectancy not be profitable over the long term. Just my 2 cents.
Just to be clear because this kind of stuff always gets attributed to me somehow, I have not made any comments on positive or negative expectancy. Honestly I do not pay any attention to it
The insurance company is a terrible example for claiming the selling of options has positive expectancy. The reason is because it's not the product itself that offers edge but rather the price at which the insurance company sells the policy for. They only make money because they can sell their policies for substantial premiums to their fair value. Sooner or later you guys are just going to have to come to terms with the fact that all of you are trading with negative edge and the only ones on this thread that are going to be profitable are the ones that can actually TRADE. Selling 1 to 2 sigma options is not a ticket to the promised land.