Yes yes yes. I couldn't agree more. That's why it's so important for an option trader to understand the intuition behind option math and move beyond named cookie-cutter "strategies."
atticus, that's an interesting statement. I'm now trying out both IC and calendars, which are doing well because the market is currently slow. But talking specifically about the IC, I put on extra wings insurance (I'm probably overweight with the amount I put on), and that, along with partial diagonalizing of the IC, reduces the negative Vega exposure significantly. So far I've not yet been able to test out my insurance and adjustment strategy in real time (be careful what I wish for!). But, hmmm, as I'm writing this I forgot what my question was...I think it had to do with being married to a position. Couldn't this type of strategy, modifying the amount of insurance, be viable in most market conditions?
Well, you've qualified your strategy by including "most". An iron fly or condor with added weight in the wings is a long backspread on the outlier, but underperforms inside one sigma. I believe you can apply a single strategy to any vol-condition provided you're willing to take-on significant deltas; i.e., a long calendar can do well into a declining vol scenario if the position was structured to reach delta-neutrality. Of course, there will always be better position in declining vol, so I suppose my answer is no. Many positions will win with long streaks. Short straddles can earn high Sharpe ratios, but will eventually blow-up. Your "heavy wings" IC will do less-poorly in high stat vol, but there is always more money to be made if one is correct on vol or Px.
People that simply rollover the same strategy every month; ICs, etc... as an automatic strategy. Every expiration they rollover to a neutral delta position, short vol. Or worse, short index puts for the skew, deep bull verticals and short puts to satisfy a historical-bias. Most people enter the options-World for "automatic" profits which don't exist.
I think what Atticus is saying is that if you get far enough along in the learning curve - that is, if you stick around options long enough and become sophisticated and experienced enough - you eventually give up looking for that "perfect strategy" you can execute like clockwork every month for automatic profits. Personally I recommend completely forgetting about strategies. Concentrate instead on the market environment and how it relates to option premium (IV) levels and premium relationships such as month-to-month IV relationships and strike-to-strike IV relationships (skews). Eventually you may find something that differs significantly from historical norms. When you do, let the situation dictate the strategy. Don't just close your eyes and blindly impose some silly pre-set strategy on the market every month.
That makes sense. Yes, my IC position would underperform other positions inside one sigma because of the insurance. I think that long streak statement is important. It could really lull you into a false sense of security, so I'd rather have my strategies tested fiercely sooner than later so as not to get too complacent. Thanks atticus!
Market makers are looking for vol-edge via flow. Order enters the pit to sell 100 calls at 30-vol. DMO buys 30-vol and looks to sell 33-vol for a static delta hedge. He's not going to be trading 1:1 contract ratios unless he offsets his position, so his risk lies outside of delta. This trading doesn't lend itself to classical positions; 1x2x1 flies, 1:1 calendars, etc. They net their risk across the book rather than trading classical positions, as is the tendency for position traders and the retail crowd. The difference lies in trading one ticker for the MMer vs the retail/buy-side's ability to trade a diversified book.
> I see some references to B. Schaeffer and he has a nice web site. Are his techniques (per CDs and DVDs) good? < I had a trial subscription once. His record was miserable and have never read anything good about it on any web site other than his!
While I love the humor in your statement, I must respectfully disagree with its content. I have found McMillan's books, especially the big one, to be extremely well written and readable. But they are not beginner books. Mark's Options for Rookies is the first good beginner book I have seen. I now have something to steer my friends toward (not that any of them ever follow up on my suggestions, anyway As for Schaeffer, yes, there is some good info on the Web site, but I don't think I would place much credence in his style. One should run, not walk, from anyone whose first statement is about much money you can make, since the first question to ask oneself with any options trade is, "How much can I lose?"