Perhaps. But that sounds a bit like those pure S-T tech traders, who say you should wait for all the techical criteria to line up perfectly before initiating a trade. Because that indicates the best time to initiate a buy or a sell.... and when they look back at it, it does always seem to work (in hindsite). The problem with that pure technical approach is, if they actually follow their own guidelines, which they don't, they would only trade once or twice a year.... if that. Although, in hindsite, they can point to where it would have worked hundreds of times throughout the year. That's to say, getting in and getting out at the right times. I have to wonder if the "presense" you speak of, is similar to the S-T tech traders I spoke of. The predictability works better "back testing" vs real time initiating.
cactiman: Looking at the SPY/SH chart. They totally mirror each other of course. How would you trade that?? I wouldn't trade that. That would be pair trading... and while pair trading is an interesting strategy it is something else entirely. http://en.wikipedia.org/wiki/Pairs_trade What I am talking about is maintaining a portfolio that is balanced and diversified. Diversified by strategy, diversified by sector, diversified by outlook (bullish/bearish). e.g. if there are developments that make it likely that some stock XYZ will face considerable challenges going forward then I would consider a bear call spread, a bear put spread (or even a naked long put) but before I would add that trade to my portfolio I would examine my portfolio to see how such a position effects my portfolio's overall delta. If my portfolio is already too bearish (i.e. has too many positions that are bearish) I would hesitate to add the trade. If my portfolio was overall very bullish then the trade would be a good addition to the portfolio... moving it towards neutral. http://en.wikipedia.org/wiki/Delta_neutral To tell if your portfolio is too bearish or too bullish you can compute it or you can simply compare the response of your portfolio to market movement. If the market moved up a few hundred points and my portfolio moved up in a similar manner and percentage I woud say I have too many bullish trades... I am not market neutral. If my portfolio moves down by a lot when the market moves up I would say I am too bearish I need some bullish balance. If my portfolio stays the same... then that is just right. But note: in using such a strategy for portfolio balance... each position needs to have its own justification. note2: in the above example choosing the bearish trade to exploit AYZ weakness would be balanced by how many similar trades i am carrying. I need to diversify by strategy so that choosing a bear call spread, a bear put spread or a long put... or shorting the stock or SSF would depend on my exposure to similar trades as well as the specific situation for XYZ. In looking at the SPY/SH graph you do see that if you find yourself with a portfolio that is too bullish a quick and easy balance can be obtained by instituting a bullish position on SH. I am hesitant to do that because the SH position would essentially be a throw-away to achieve delta balance. To continue ad-nausiam I also want to diversify by sector. e.g. if XYZ is a utility and my portfolio already has a number of trades on utilities it would argue against adding the trade. If I had no utilities it would argue for adding the trade (unless I expected utilities as a group to face problems in the short term future of course)
Yep. Just as I stated in my original thread. Oldnemesis is a "theoretical " trader. Sounds great when described, sounds great on paper, even works great in hindsite. But the only people making money via this strategy are the brokers. They all love it! I suspect the type of traders who actually try this strategy in the "real world", are those who have been smacked in the face via spread and IC type trades. After having their accounts devastated by excessive stock/index swings, they now look for a delta neutral type strategy. What better place for a theoretical trader, than in delta neutral "Theory Land". OOPS! Time for another adjustment.
Actually the biggest challenge to maintaining a portfolio balanced in multiple vectors is the non-linearity of pay outs. e.g. a bull put spread while very efficient (in terms of yield) in providing bullish balance quickly flattens out both at the top and at the bottom: http://www.theoptionsguide.com/bull-put-spread.aspx as do many other strategies. If the market makes a big move it is easy to find your self with a suddenly bullish or bearish bias because all of your spreads have maxed out. Long calls and long puts while less 'efficient' for small moves do not max out on big ones. Thus the need for judgement and experience to successfully pursue market neutral strategies. Remember that 90% of option traders lose money... how is it you will be part of the 10%???
Quote from oldnemesis: <<< Thus the need for judgement and experience to successfully pursue market neutral strategies. Remember that 90% of option traders lose money... how is it you will be part of the 10%??? >>> I don't know about the 10% claim, but it all goes back to my original statement to SLE. No matter what the strategy, it always boils down to the same issues of: "Experience,.... common sense,.... and risk management" And btw,.... set reasonable % return goals.
An example of setting UNREASONABLE % return goals is,.... having the same % return goal today, with the VIX in the mid teens, as you did when the VIX was in the 25 - 35 range. Traders need to adjust their strategy expectations, to current market conditions. (Which btw, leads back to the issues of experience, common sense and risk management.)
The first thing I recently learned is that my broker by default will exercise all my options that are 0.1 ITM at expiry (even if I would have prefered no to). Luckily I had enough money in my account to purchase the stock that time. Now I have contacted them and they have told me that I can instruct them ahead of time whenever I don't want the automatic default exercise of long calls or puts.
Nothing bad about a strategy setting up twice a year if the signal is sufficiently strong and "fool-proof". You just have to have many strategies like that to achieve diversity. For example, calendar trades on indices usually only set up properly after large volatile shocks, yet they tend to be pretty profitable. There is more to options trading then selling risk premium, that's all (even you know that, since you spend most of your time figuring out stock fundamentals). That just means that back-testing is being done wrong. If you only had 10 trades in the past 10 years and you add ten features to the model to create a real smooth equity curve - hell yes, you not going to be able to reproduce it in the future. If you taking something that has positive expectation already and add some sensible filters (e.g. don't trade in a certain environment, don't touch certain classes of stocks etc.), usually you will be able to reproduce your backtests pretty well. You yourself use a watered -down version of back-test by looking at support at 2 and 5 year horizon.
<<< There is more to options trading then selling risk premium, that's all (even you know that, since you spend most of your time figuring out stock fundamentals). >>> I study a stocks funamentals to select my stocks, as I prefer to only invest in companies I'm willing to own. And if I'm willing to own them, it's because they have dropped below my strikes. So I study the fundamentals to evaluate whether they are recoverable back to my strikes. I do that because it gives me other choices, other than selling for a loss. I use the 2 - 5 year charts to select my "strike prices",... for the stocks I'm willing to own, because I liked the fundies. There are times i really like a stocks fundamentals, but the tech support sucks. Thus i will probably not do the trade. And there are times i love the tech support, but the fundamentals are terrible. Again, i will probably not do the trade. You have no idea how many stocks i review each week, before i find one where the tech and fundies both match up. It's a pain the the ass and lots of eye strain, particularly since i have sig eye issues. But it beats the alternative of selling for a sig loss, when my strikes are breached.
So it sounds to me that in the end we both do the same thing (careful, intelligent process before initiating a trade), me using "whatever" models and you using fundamentals and technical analysis.