I signed up for the Yahoo group a couple days ago. It will give some more great weekend reading to parse through historical threads. I am generally not a fan of selling options with expirations 45-90 days to expiration. All of the studies that have been shown where you get the best theta burn over those periods require (from my point of view) too much leverage to generate a reasonable return. Also, in the situations where you must adjust positions, you are not giving yourself as much flexibility with future calendar dates & strikes to work with. So a lot of the theories that I have developed incentivize me to stay as close to near term expiration as possible and then manage the position appropriately. I think this is not one way is the right way - it's more of, I haven't been able to get comfortable with the 6 sigma scenarios in the other way as much as I can in my approach. So a trader goes with their comfort level. I hope to really understand the theory around longer dated options trading by reading past posts. One of the reasons that I have enjoyed my recent time on EliteTrader is that level of discourse from the people who write here. While some of the threads seem like flaim bait, for the most part, I see people genuinely interested in practicing their craft and sharing their perspective. It's along these lines where I appreciate everyone's concerns around the necessity of hedges. I do not take any such comments lightly. When I first started trading, everything was hedged, but the more I have modeled disaster scenarios --- combined with my comfort with not requiring any cash withdrawals for a minimum of 12 months --- have slowly biased by trading into styles where there is the appropriate amount of sizing control vs. those that require spending units to buy hedges or to delta hedge with ES futures, for example. Now having said that, I have not modeled the impact of ES futures hedges. And I model everything, so I have the homework to look at that and see the potential trade offs. I have found that vertical spread hedges are awful to deal with and do not offer the protection for the cost. So they are only used in my IRA account. The calendar hedge by purchasing 8-15% 1 month expiration puts with 10% of the collected credit had some very impressive early results in the modeling. That was a scenario where the cost - gain payoff may be worth it. However, the early analysis also indicated that a 10% drawn down of credit each week would have a tremendous impact on compounded weekly growth. So to maintain the same growth rate while putting on the hedge would require the ratio strangles to - perhaps - be tighter to ATM than initially planned to compensate. Again - more modeling to do. Of course you need liquidity, no gap down, etc. Lots of things that one is making assumptions around. FWIW, I have done scenario analysis on what would happen in a black swan event if the market dropped > 20% in a single day. If the number of strikes opened allows for a minimum 40% downside move before a margin call and the vix spiked to 150, then a three week roll would allow for a 10% reduction in leverage by closing puts, a move 8% lower in strike price (so now only ~9% ITM), and keeping the cash position the same or larger. This effectively, after the reduction in leverage, gives room for the peak-to-trough drop of 55% before the margin call kicks in. This is after a single adjustment, and we are close to the 2008-2009 scenario. And given that it was pretty much a 6 month ride down, I would have been heavily deleveraged along with monstrous call premium coming in through those six months. My estimates were that I would have been netliquidation value ahead after about 4.5 months of adjustments, and 2009 overall would have been a terrific return year because as the market flat lines, with the high volatility, the premiums for the normal positions after the deleveraging would have been fantastic. In many accounts quite sad that I didn't get to be running this during that time frame. Cheers, everyone.
I do believe you should consider options on futures as well. If a bunch of pissed off Chinese day traders donning Lion masks decide to invade Greece banks during evening hours you atleast want to have a market that will allow you to do something, anything - vs trading on the equity markets where you get to watch a gap basically punch you in the face. I wouldn't be surprised these days if liquidity in ES FOPs is on par or maybe even better than SPX options.
NPTrader ...... You lay dormant for 3 years - then suddenly spring to life with multiple lengthy posts in a few days. What is your agenda? I suspect you will disappear just as fast as your re-appearance.
I didn't have anything useful to say. The system was just executing against the plan and I did not see a lot of need to adjust / change / modify / improve. However, over the past couple of months, I have allowed my mental time to get increasingly absorbed with this trading strategy. I think it started with a random news article that I read on a financial site that talked about the issues with volatility in a way that I hadn't considered previously (in spite of all my modeling). And that it was the sort of comment that is innocent to most, but became a splinter in my brain. And that splinter grew well beyond the initial concept into a whole range of areas worth exploring further: 1. How to improve the rate of return without increasing the risk. 2. How to protect against 5 and 6 sigma events. 3. The potential to write a book one day in retirement. And those interest areas exploded further as I researched the evolution of volatility. And at some stage, landed back at ET into some deep threads where there was immense value + education. As a software entrepreneur that makes open source software, there are strong principles of openness, transparency, community, and training that exist even amongst competitors. The best software is built by those that give back to others. So as my learning leaned in, I believe that my learning is accelerated by giving back. So as I started to come accross threads where I had a starting point of view, it was time to start commenting. I ultimately want to get to a point where I publish the entire strategy - the setups, he margin control, position sizing, and when / how to make every possible adjustment, along with optional hedging components. But posting initially in these threads allows for a begging back and forth dialogue, an opening of the sharing, and potentially mutual gain. I generally do not share the same concerns that other traders have which is that revealing a strategy gives up ones edge. I believe I have a trading edge, but the strategies that I have developed contain many variables which can be adjusted for risk appetite. And as we have seen, every investors strategy appetite is quite different. So even if I get to a point where I am comfortable publishing the specific details in full, it's unlikely to have an impact on my results. Oh, the lack of really being involved in ET may also have to do with ... in 2012 I founded my software company for which I am a CEO & board member along with joining a VC firm which got me onto the boards of 4 other companies. I was learning how to be a good entrepreneur and VC at the same time. There were lots of distractions there that kept me from immersing myself mentally into algorithm improvement. Will I disappear as quickly as I have showed up? It's possible - I do about 180K air miles a year for work, and when a company for which you are investor + board member has a material issue, it is all consuming (drop everything, work 20 hours a day managing the situation to its conclusion). BTW, aren't the best protagonists in movies the ones that appear suddenly?
I love this part about ES options. They - like SPX options - also get 1256 tax treatment. I haven't stated it, but believe my total returns are about 3% higher compouned on a net basis because of this. What I don't like: 1. 2x the opening contracts which means 2x the commission. 2. Commission cost on IB is about 20% higher / contract. But I have always felt that in a fast moving market if you have SPX options open, you can still open ES FOP to get the hedge benefit, if that was needed. Correct me if I am wrong, but I don't believe IB PM uses ES & SPX positions together in calculating your margin. They are treated as separate positions, so naked ES puts couldn't compensate for naked SPX calls.
That’s correct, the SPX options sit in your “securities” account and ES options (and ES future) sit in your “commodities” account. The SEC regulates the first, the CFTC the latter. Even if they do cross margin at some point, they settle on technically different things – the SPX uses the exercise-settlement value (SET – you can read about that offsite) and the ES option uses the ES future. Generally this would mean your fine for hedging expect on expiry, which theoretically could throw things way off.