Dave, I know where you are coming from...I had what I thought was a very wide 100 point condor, 790/800/690/680 and both of my shorts were well OTM yesterday. Ofcourse, this morning I was only 20 points OTM and as I write the market is in the green again and the RUT is up only about 13 from my (previous) short. Whenever the index gets near 20 points of my short strike I start looking for hedges around the 'within 10 point territory'. That's what you were really asking I believe, is it ok to wait and hedge when you are 10 points away, or should you be hedging prior to that? Obviously, in your case, having a strike that's still > 20 points out is not that bad with one trading day left, but I feel like the RUT just explodes or implodes all the time, > 10 point days. I also would like to know at what point others like Piccon and Hybone (RUT fan) put on their hedges. Just interested/curious. At any event, I put in an order to close my spread this morning but the bids never appeared on my long 800. I was away from my desk in meetings and thought for sure I'd get filled since the RUT seemed to not move too much when I checked on it. Long story short, I canceled the spread order when I got back and watched the index and finally saw an ask that I felt comfortable buying the 790 back at, which was .25 and that allowed me to keep a little bit over 60% of the original credit that I took in. The ask got up to about .45 today but there was still no bid on the long strike. I am still deciding if I like the feel of the RUT, the danger seems to be a little exaggerated compared to SPX but it was good to see others writing today. I knew Picc had 780, good move to get out. sd
I don't know when CNBC is going to rally the Market again. These guys are sick. Whenevr they want to rally the market, they call a Fed member to come and say that interest rate hike is almost done. Do you remeber the one who came last june in Kudlow and say that We were at 9th ining. This baseball game is still going on. Two weeks ago they came with Kansas Fed and yesterday they brought San Francisco Fed. They are just manipulating the market. Yesterday interes rate was almost done and today CPI is hot. I don't care what they say or do. I will make 4K-5K a month going FOTM
I have just started considering the RUT, as an addition to SPX & XEO trades. For the guys trading Iron Condors on the RUT, are you doing the put side of the Condor first and then completing the call leg once the RUT has moved up the channel?
Mav, I really appreciated your comments to Coach about the Debit vs. Credit side of the spread. I further researched the latest movements on the SPX over the past two years.... What I found was..... buying debit spreads, as you suggested, slightly out of the money was a much greater return over the long haul. What would be difficult is taking a four of five month hit in a row..... then getting a homerun. According to my analysis, the expected return over the long haul was much greater. And, as you suggested, it would be much less stressful / less emotional. Would you care to express your professional opinion based on your current work experience and firms 'unofficial' records as to the validity of my recent analysis. Thanks, Murray
Taking a hit month after month on hopes of a homerun before you run out of capital..... I'm failing to see how this is less stressful.
Murray, Could you elaborate further. Coach usually places his spreads around 2 std deviations from the then current price of the underlying index. Are you using the same strikes for your analysis, or were you picking closer strikes? Wouldn't the directional bias of the index become far more important as a buyer rather than a seller. Under Coach's strategy (now followed by many of his pupils) a minor directioanl bias against the position may very well be inconsequential depending upon the timing of the move against the position. Cody
Agree Cody...Murray said "slightly out of the money" which is NOT where Coach and the rest of us buy/sell. Agree with Cache as well...to me buying prem is MORE stressful than selling...don't know why....
Murray, you are not mistaken. Although I fear on this thread, and it's no fault to Phil, that people become fanatical about their ideas. Whether it be over politics, religion, or even trading. We latch on to something and then refuse to ever look at the other side of the coin because we want to believe it so bad. I could write 100 pages about the idea of selling premium over buying premium and vice versa. But I would not know where to start or where to end. Let's try this for a minute. Let's remove the whole idea of the greeks. Let's simply look at options as a bet on fair value. When I interviewed in Chicago for the first time to work for a market making firm on the floor, all the companies asked this question. They said you are going to play a game with one six sided die. You roll the die, whatever number comes up, you get that much money. So if you roll a 3, you get $3. If you roll a 6, you get $6. You are going to play the game over and over again. There are two players in this game. The roller and the house. The house is selling the bet, or selling premium if you will. The roller is buying the juice. The question is, as the roller, how much would you pay for the right to roll the die. Then, when you are the banker, how much would you sell the bet for? For most of you you can figure out this is a very simple probability game that you probably played in your stats class in college. The fair value of the bet is 3.5. You get this number by summing the outcomes and dividing by the total. (6+5+4+3+2+1)/6=3.5 That means the fair value of this bet over a long series of throws is 3.5. So if you are the roller, you want to pay less then 3.5 for the bet, say 3.4. If you are the banker, you would want to sell this bet for more then 3.5, say 3.6. What you just did is you made a market. You are 3.40 bid at 3.60 offer. Folks, this in a nutshell is what options are all about. It does not matter if you are the roller or the banker. The person buying the premium or selling it. If you buy the option below fair value, you will make money. If you sell it for more then fair value, you will make money. Market makers have been doing this since 1973 and nothing has changed since then except the technology. The whole idiocy of buying vs selling premium is as bad as the whole red state/blue state garbage. If you can grasp this very simple concept, trading options will become much more simpler for you. Yes, over the long run, the buyer of premium will generally outperform the premium seller for one reason and one reason only. Not because he/she is a better trader. But because of something called luck. That's right, luck. Luck, is very much like volatility in that it doesn't have a positive or negative bias. It simply is what it is. You will have both good and bad luck in your life. The difference here is that when you have good luck as the long premium trader, you might retire off of it. Bad luck to the option seller will bankrupt him/her. Good luck will do nothing for the option seller as there is very little upside in what they are doing. This brings me to one of my favorite quotes from the movie "Rounders": "Amarillo Slim, the greatest proposition gambler of all time, held to his father's maxim: You can shear a sheep many times, but skin him only once. " Well, that is what an option seller is trying to do. Their only hope is that they can sheer a sheep 1000 times before they get burned. The inverse is then true for the option buyer, bad luck is really not going to hurt him/her. Now something to keep in mind here. I'm making lots of broad generalizations here. In my opinion, one should do both. I prefer to buy cheap tickets and sell fat juice. I prefer to be net long contracts but net short premium. The best of both worlds. My argument here is not with the strategy or viability of it, but rather the assumption that it works better because you have a net credit. The net credit is meaningless as is the net debit. Just remember the dice game. Fair value, makes no difference if you are the banker or the roller. Everything else is just conversation.