rally, is the bulk of your trading ctm? do you hedge with any long options; or just exit a trade that you decide is not profitable? as i trade er2, if i was 20 or 30 point out with what was a fat gamma trade and the the market moves 16pts toward my short in one or two days; what course of action would you do? i currently have shorts at feb 695....but of course i'd like to study other options(couldn't resist). also, is your background professionally based? i just find it interesting to know if you do not mind.
Hi Rally, I think you and I are in total agreement. Sure, the initial credit received is important - but IMHO, it's only important in deciding whether or not to open the position. My disucssion is based on the assumption that the "to open or not to open" decision has already been made. Once I own a position, there is nothing I can do about the initial credit or how much I have made (or lost) so far on that position. I believe that the decision to adjust, close, or hold is not related in any way to that initial credit. Regarding 'fat gamma': It stands to reason that a spread that is CTM will be sold for a much higher credit than a spread that is FOTM. Greater risk means greater rewards. It also means more skill is required in managing the position (a point often overlooked). My point is that whether one collects $4, $2, or $1 for a given spread, managing risk and deciding whether to adjust, hold, or close should not be based on that credit. N'est pas? Mark
I didn't state explicitly, but I meant the R/R at the point of opening the trade. I think the pros look at R/R on a daily basis (i.e. marked to market) and manage risk that way... never letting any one trade or total portfolio risk exceed certain thresholds.
I think we arguing semantics though... That's the bottom line and I agree. ... i just dont see how the credit ceases to matter as soon as you see the fill in your account. It matters. It just plays no role (I know that I hold the minority viewpoint here) in deciding when/whether to adjust/hold/close. How can you say once the position is on, the initial credit is irrelevant when it dictates the r/r until offset? I don't agree. The initial r/r dictates profit potential, but the current r/r dictates ongoing strategy. Say i sold an ATM vertical at 1:1 r/r vs someone selling a FOTM vertical at 10:1 r/r do you honestly think that this is irrelevant to how/when it is adjusted/offset? No. Each of those methods requires a diffent adjustment strategy. I'm sure we agree there. But, what i am saying that whether you open a CTM spread for $3 today or if you opened the same spread for $4 a week ago that the correct adjustment methodology is identical and is totally unrelated to that original credit. And I'll go further. Once the position is open, a CTM spread can easily become a FOTM spread. (And a FOTM spread can easily become a CTM spread.) Now the question becomes: do you adjust this spread (if necessary) based on the fact that it was once a CTM spread? Do you adjust it based on the fact that it's now a FOTM spread? Or do you adjust it when future market conditions tell you that the then current r/r is unacceptable? I adjust when the current condition is unsatisfactory - and the amount of cash I received when I opened the position is going to affect my final P/L, but it has zero bearing on my decision to adjust. I adjust to reduce risk. I manage my portfolio by trying to make money each month. I DO NOT manage it by trying to make each individual trade a winner. I know that premium selling is a strategy that guarantees losses part of the time. My goal is to generate as much income (within my risk guidelines) as I can for my entire portfolio and not be concerned if individual trades are losers. That means I adjust when the position has an unacceptable r/r profile - based on it's current price. Again, it's semantics. Thanks for the discussion. Mark
my question was not regarding m short 695's. i should not have added that. the question referred to a hypothetical spread that was put on 20-30 otm and then then market moved 16 or so points toward the short strike. what i was interested in knowing is; what would you do if this event occurred? totally hypothetical. if you needed to know some other points regarding why the trade was put on or other issues, there are none since i made up the scenario. just want to see how you would react. maybe you have some recent management trades that are similar. again , i am interested in how you manage a trade that does not go as you predicted.
Rally, I've been doing a few CTM spreads recently too. A question: when your spread turns out to be a bad trade (i.e. directionally incorrect), what action do you take (i.e. take the spread off, adjust, etc)? Thanks!
domestic, andy, i would most likely close it, take the loss and wait for the next signal. I dont believe in adding expectancy to bad trades by hedging or adjusting them.
Rally -- I agree. I have been disciplined in closing my CTM credit spreads upon hitting my stop (my stop is based on the underlying, not the spread value). Unfortunately, it's much more painful to get stopped out of a credit spread than an equity/futures trade because of the b/a slippage on the spread. How do you overcome this disadvantage? Any advice is much appreciated.