>But I don't see the IC as a good trade to put on all at once. Not on SPX. Ok, so you are a leg-in type of trader. I just don't have the guts to leg into an IC, especially with the SP. I lost so much of my account because I did not know how to make the adjustments. I was simply doing in and out. Lesson learned == a small position size will lose alot of money, if you don't know what you are doing. I was doing 1-2 contracts in the big SP with a 36k account. I should have been doing one contract in the ES.
>What I don't have a good feel for is when to get in. I understand that IV must be low, but I'm not clear if I need to get in about 4 weeks to expiration or can you still place a good trade even two weeks out. Working on that myself. I am thinking that this is a long position, so get into the put diag when the market is up, and the debit premium is very low. Had the opportunity to get into a diag at almost even, but didn't take it. Now it is over 50 cents. If I see a close to b/e diag, take it. This is truly a free trade. (I think....?)
Good points...on a sub 50K account the SPY /ES should be used. On the SPX I think IF your going to end up with an IC you HAVE to leg in (agree with Jeffm) with doing one side on a countertrend move then the other side. Buying the long then selling the short is tricker and sometimes it works, sometimes it doesn't . The single most important factor is having enough cash to manage the trade. I certainly learned that lesson in June. If I had not built up a cash cushion I don't think I could have traded my way out of trouble.
Alas, no free trade if I understand you correctly. Entering diagonals based on getting a credit/minimizing debit is potentially a dangerous exercise if not looked at in the context of the other variables IMHO. One can think of diagonals as a reduced cost calendar spreads. What reduces the cost/debit? The embedded credit spread gives you a credit which offsets some/all of the calendar's debit. Where's the downside to this wonderful arrangement of getting a calendar for free? You've just increased your risk - think of the risk involved in a short vertical/credit spread. A diagonal where the strike difference between the short leg and the long leg is large in order to reduce the debit of the diagonal etc. is tantamount to having a wide vertical embedded in the diagonal. We all know that wide verticals have larger risk than narrower verticals. This is reflected in Reg-T margin requirements of the position. A diagonal where the short strike is FOTM is tantamount to having a FOTM embedded vertical in the diagonal. We all know what can happen with these: the embedded vertical sold for $0.50 can go to $9.50 if the underlying moves against you. Risk profile can look like a cliff almost as scary as front month FOTM credit spreads. Most diagonals, especially if there are a number of months between front and back month, are however dominated by the calendar component day to day. To echo RR comments on another thread, it is wise to understand calendars and verticals before looking at diagonals for multiple reasons...and then a double diagonal is yet another kind of animal as the two diagonals have opposing (delta) and complimentary (vega) desires. 2 cents. MoMoney.
Actually I found that there is negative expectancy for nakes or vertical calls, but you can find naked puts or Vectical with positive expectancy even with strikes around 2 sigma. Most of Coach's verticals have positive expectancy. I am going to check and see if vert at 1 sigma has positive expectancy. Percy
Great post, MoMoney. A diagonal is a combination of vertical spread and calendar. One can see the behavior of a diagonal by adding these two. It has been posted that a diagonal gives you a better reward for some price range ( close to short strke). However a diagonal has a higher risk (strike difference + debit), and it has a narrower price range for profit. I still can't find out the expectancy of a diagonal because of the many future variables involved. You need to have an opinion on what the price will end up and then decide the best strategy for your prediction. Sometimes it is hard to compare two positions with the same strategy but different strikes (example two verticals with different strikes such as 1 sigma and 2 sigma), not to mention the comparison of diagonals and verticals.
I am very sorry to hear that. 50% seems a lot, but how much do you normally make? If you normally earn over 25% in a month, 50% loss in a month should be ok. For positions with high probability winning such as verticals, an loss of 2 month profit is acceptable. I had a huge loss in June b/c of my naked puts in OIH and VLO, but I make up half of it already in July. Position sizing is the key to success in speculation.
Dan Sheridan is a former CBOE MM who does coaching now. He did some webinars for CBOE that you can find here: http://www.cboe.com/LearnCenter/webcast/archive.aspx I was just mentioning what Sheridan does, which is place the short above 1 sigma, typically with a 10-15 pt spread. FOTM, CTM, ATM. Each has their benefits and drawbacks. That's wrong imo. Better to be in cash if you don't have the setup you want. But that's the nice thing about a FOTM trade. The setup doesn't need to be perfect since you are putting the %w/l so far in your favor. If your entry trigger is when the stoch hits 80, then just do the trade. You're not worried about picking the top with a perfect entry. It just needs to be "good enough". The entry is more important for a call spread, since you don't have the put skew to let you go farther otm. Naturally, you are taking on extra risk and sacrificing profit to get a high %win/loss. Such is life for a FOTM credit spread.