Upside Move In SPX This Week
- Thread starter JoeA
- Start date
I would imagine an expert which I am not would be able to make an income trade in any market but in my opinion I would say 2017 was a low vol environment
That was a transition year for me where I gradually moved away from BWB trades to unbalanced condors to eventually just put credit spreads and also got shorter duration and it worked well until this year of course when vol exploded
After the vol explosion I started looking into diagonals and calendars and I had some success with them so I am looking to do more with them
Of course I am always open to learn about new strategies that could work with my style of trading
The gap down and up are one of the biggest problems for my type of trade where there is nothing I can do about it until the market opens and than just hope that the market fills the gap before expiration or I can roll it out
That was a transition year for me where I gradually moved away from BWB trades to unbalanced condors to eventually just put credit spreads and also got shorter duration and it worked well until this year of course when vol exploded
After the vol explosion I started looking into diagonals and calendars and I had some success with them so I am looking to do more with them
Of course I am always open to learn about new strategies that could work with my style of trading
The gap down and up are one of the biggest problems for my type of trade where there is nothing I can do about it until the market opens and than just hope that the market fills the gap before expiration or I can roll it out
Dan, are your trigger points specific levels of the underlying? In other words, is it necessary to use a broker that allows for "Conditions" under the "Order Rules" as ToS does? I'm using Tastyworks right now and, inexplicably, it's not possible to trigger an options order based on movement in the underlying...
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Hi Joe. If you are a member of Amy's Service, she may have specific recommendations for you. I have had my best results with trigger orders based on specific price levels of the underlying. I have not used Tastyworks. If you are, in fact, unable to enter GTC orders based on a trigger price of the underlying, then you can probably place STOP orders either on the short leg or a spread. Sometimes, however, these orders are not filled in the manner you would expect. If you are able to watch your positions fairly closely, you might do best by placing STOP orders on the short leg alone. Then, you can either sell the LONG leg or add another short below the first. Best of luck.
Thanks for the fast and detailed reply, Dan. This might be a viable alternative that I'll have to look into. In the meantime, I'm gonna stick with my current approach which is to hedge the left tail of my ATM trades with shorter-duration OTM put debit spreads. It creates a P/L drag, especially on the upside, but it's also a more conservative approach to managing risk (for me) than using GTC orders with triggers.
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That may be helpful, Joe. However, if you study how far into the wing of a an OTM debit spread that the market must move (and the length of time it takes) before the DS becomes profitable, you might be a bit surprised. Of course, if the market continued down, your DS would eventually achieve its full value (the spread width times 100 times the number of spreads). In the meantime, however, the original put credit spreads are being hit hard. May I suggest another alternative: cheap OTM calendar(s) which would become profitable on a downside move as the underlying moves into the calendar tent and as the volatility increases. Or, you could consider a cheap OTM butterfly with the center strike placed at the expected move. If pinned, the "fly" would make decent money. Just food for thought, not specific recommendations
Let me drop in my $.02.
Dan, good presentation on TG1, thanks.
We touched 2 methods of protecting downside. DGH buys back short PS and than thinks of next course of action. JoeA use shorter time long PS.
Both methods are valid and have place in traders repertoire. Imo, it is mistake to limit yourself to only one.
In general, 'buying back' method is preferable in high vol env, when long PS is better (usually) in low vol.
To me, DGH way of placing GTC order is bit costly. If you trade more lots it can eat good part of profits, also is susceptible to 'riding stops' actions. On other hand it does not require much of traders attention. JoeA's method delivers constant drag on pl but enables bigger profits in cases where spot reaches center of main structure and bounces. DGH already locked in the loss where JoeA can patiently sit over because he has hedge already in place and is not affraid that much of max loss.
By comments to JoeA's, I suspect DHG has bit different point of view on how to deal with long PS, and I admit I don't fully understand it.
Using calendars or BFlies is another way to protect downside but, imo, has so many disadvantages that shouldn't be consider as primary tool.
I also tend to use long PS approach as it gives me greater flexibility. Best results are obtained when tools are used appropriately to what is in front of you. One shoudn't use hammer to fix everything.
There are of course other methods to protect downside, like adding full structure below main one - to be same type as main (Boxca, BWB), or regular condor/ Bfly or uphill fly or other depending on market conditions. Power is in knowing what and when to use.
Choosing downside defense impact of actions on upside...
Dan, good presentation on TG1, thanks.
We touched 2 methods of protecting downside. DGH buys back short PS and than thinks of next course of action. JoeA use shorter time long PS.
Both methods are valid and have place in traders repertoire. Imo, it is mistake to limit yourself to only one.
In general, 'buying back' method is preferable in high vol env, when long PS is better (usually) in low vol.
To me, DGH way of placing GTC order is bit costly. If you trade more lots it can eat good part of profits, also is susceptible to 'riding stops' actions. On other hand it does not require much of traders attention. JoeA's method delivers constant drag on pl but enables bigger profits in cases where spot reaches center of main structure and bounces. DGH already locked in the loss where JoeA can patiently sit over because he has hedge already in place and is not affraid that much of max loss.
By comments to JoeA's, I suspect DHG has bit different point of view on how to deal with long PS, and I admit I don't fully understand it.
Using calendars or BFlies is another way to protect downside but, imo, has so many disadvantages that shouldn't be consider as primary tool.
I also tend to use long PS approach as it gives me greater flexibility. Best results are obtained when tools are used appropriately to what is in front of you. One shoudn't use hammer to fix everything.
There are of course other methods to protect downside, like adding full structure below main one - to be same type as main (Boxca, BWB), or regular condor/ Bfly or uphill fly or other depending on market conditions. Power is in knowing what and when to use.
Choosing downside defense impact of actions on upside...
Nice analysis, Marcas. I have a feeling that you're right about the additional complexity that flies and calendars bring, but I'll need to do some research on my own to assess. My instinct tells me to keep any hedges simpler than the main structure, but @DGH is an "OG", so there must be something to them if one can develop the intuition.
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Thanks for the clarification, JoeA. I thought it stood for "Old Guy". Just kidding. To address the subject of the thread, I should emphasize that the goals of the Boxcar (or any strategy, for that matter) should be: 1. high reward to risk ratio 2. low draw-down in worst case scenario situations 3. positive expectancy over time and 4. relative simplicity of trade launch and adjustments. For the record, I don't make any specific adjustment recommendations. My choices may not be suitable for other traders, particularly if the trader is unfamiliar with all the nuances of a particular adjustment strategy. I have been trading a long time, and superimposing calendars, butterflies, debit spreads or "cut and rolls" of existing positions are second nature to me since I know how each will perform over the duration of the trade. Traders who are not familiar with these strategies as they relate to an existing position should probably not do them. As long as a trader adheres to the goals above, he or she should be successful over time.
Thanks Dan for doing an update on the Boxcar trade
I see there is a difference between the original one and the recent one
You said the goal is to have 1 high reward to risk ratio
In the original one you had a better than 1 to 1 ratio while this one is more like 1 to 2 so basically double the risk to reward
Is that still ok ? Or is that only because you have the contingent orders in place ?
In your opinion how far can you push the risk/reward ratio and still have a manageable boxcar trade ?
I think the double calendar might have better risk/reward if it wasn't for the volatility which is hard to predict where it's going to end up at the time I might want to take the trade off
The TOS model is way off when it comes to calendars but even so there is good money to be made with double or triple calendars
I see there is a difference between the original one and the recent one
You said the goal is to have 1 high reward to risk ratio
In the original one you had a better than 1 to 1 ratio while this one is more like 1 to 2 so basically double the risk to reward
Is that still ok ? Or is that only because you have the contingent orders in place ?
In your opinion how far can you push the risk/reward ratio and still have a manageable boxcar trade ?
I think the double calendar might have better risk/reward if it wasn't for the volatility which is hard to predict where it's going to end up at the time I might want to take the trade off
The TOS model is way off when it comes to calendars but even so there is good money to be made with double or triple calendars
A somewhat higher risk to reward ratio for Boxcars is generally acceptable if contingent orders are in place or if the trader's eyes are glued to the screen. My original presentation with a 1:1 ratio was an idealized version. Remember, at that time I did not know that Amy would begin a Service. I never have a risk to reward ratio of greater than 2 since, beyond a R:R of 2, the trade is no longer "mathematical" in terms of credit received versus debit paid. Regarding calendars...hypothetical modeling of time spreads (calendars and diagonals) is, by its very nature, problematic. I don't pay much attention to risk graphs or greeks (except theta) of calendars. However, I use the risk graph to determine when to add another spread to an existing position or cut and "leap frog" an existing calendar to a new strike if the underlying has moved substantially. My main focus is on the P/L which I monitor closely. It does not pay to be greedy with time spreads, so I take my profits and/or reduce position size before gamma begins to increase significantly. Also, liquidity of the underlying vehicle and narrow bid-ask option premiums are critical for success in trading time spreads.
Thanks for confirming I thought so too
What about on the upside ?
Is there a certain ratio between the profit and loss on the upside that you look for or that is not so important since you have your contingent orders in place ?
I made a setup slightly differently just to see how it looks
I started with the debit spread just to see what is the minimum credit I need to make it look somwehat aceptable so I used the 24 jul expiration in SPX so that is 12DTE and I placed 1 spread ATM 5 wide for a debit price of 1.95 and then went out to where the shading changed on TOS so that is just outside the 1SD and put on a 10 wide spread for a credit of 1.00 and that puts the short at 15 delta
So for one lot I have -$2975 on the downside and $2025 under the tent so that would be close to 3:2 risk reward while on the upside I have -$475
My question was about the -$475 Would that be axceptable or is that too much risk on the upside ?
The margin for the trade is at $2500 for this setup
Hi status1. I use my TOS risk graph and alternately check/uncheck the credit side and the debit side of a potential trade and project the time horizon 3 to 5 days in the future. I am looking to see critical trigger points (in terms of P/L, not greeks) at which I would make an adjustment. For the upside I am looking to adjust at a point where the credit side profit would still exceed the DS loss (assuming, of course, that the credit side attained maximum profit). My adjustments may be different from Amy's, so I don't want to elaborate in detail. I will only say that my "tool box" consists of: adding a calendar, selling a DS, rolling up one or more DS, adding a put credit spread, or closing all DS (depending on time remaining). I don't wish to elaborate on downside adjustments since, again, they may differ from Amy's. If you subscribe to her Service, please take your cues from her. The approach you described should work fine. The upside loss you indicated is probably OK, particularly since it is unlikely that you would assume the full loss if you monitored the position carefully. Good luck.