thoughts of experience trader on all income trading strategies

[Bsp]

Since joining option community, I have seen so many option income strategies. If all strategies works than whats need for all these strategies? Is it because different risk/reward profile? At the end all strategies will work if marker stay in range.

Any thoughts from experienced trader please?

 

[Harry]

Make a few trades - just 1 contract each, maybe only paper trades, maybe only backtest, but take 1 trade every week, and then do at least 10 of them with 2 different strategies, and then do come back and describe how they were all the same. Just like the english alphabet has 26 letters and Shakespeare made a killing using this - if there was ever a need for a 1000 year copyright, his family would have made a killing. But all we got in options is: buy an option OR sell an option but you can find 1000 websites teaching options by mixing and matching puts and calls, buying and selling, and this month vs next month. There must be something that makes them different, no? I am not saying I know the difference, but dig deeper, try out a few things and see if you can see "some" difference.

On a more serious note, these thoughts come to my mind: how much time do I have (to manage trades), do I have an opinion on the market (bullish, bearish or none), what is my risk appetite, what is my growth expectation (conservative, aggressive or super aggressive), how well can I make and follow a plan, how well can I test, am I a maverick rather than planned person, do I have time commitments or travel commitments that will come in between trades. I think just these parameters can change what strategies you can use or you can not use and that is even without me saying the word butterfly.

 

[RTB]

I am not an experienced Options Trader

Since joining option community, I have seen so many option income strategies. If all strategies works than whats need for all these strategies? Is it because different risk/reward profile? At the end all strategies will work if marker stay in range.

Any thoughts from experienced trader please?

I am not an experienced Options Trader yet but my way of thinking is. There are so many different strategies because the Traders who developed them. Started off learning the basics like everyone and kept working towards creating strategies that fitted their personalities. Creating your own Trade what a brilliant achievement.

 

[Kevin Lee]

There are many ways to trade profitably. There is no "best" way. Only what is most suitable for you. The most profitable strategy isn't the best strategy if it doesn't fit your lifestyle and most importantly your psychological make up. Therefore, when you evaluate the suitability of a trading strategy, you must pay attention to how you "feel" about the trade. Yes, it's important that we understand the risk and reward, the adjustment techniques, options greeks etc.. etc... All these are the technicalities. What many traders, including myself, didn't realize in the beginning is that a strategy isn't a good one if it doesn't suit us.

One example is some people, like me, cannot and prefer not to consistently monitor our positions everyday. Therefore, I cannot take on any strategy that has high gamma risk. I seldom trade closer than 14 DTE. I close most of my trades around 21 DTE. I do understand the most juicy part of the theta decay happens after 21 DTE. But it's my deliberate choice to not part take in these profits and thus leaving money on the table.

On the other hand, there are far-OTM strategies are supposedly super safe, but the trade off is extremely low yield. To overcome that, one would have to leverage up by using portfolio margin. Again, that's another no no for me. Using high leverage in order to boost up yield is a red line that I will not cross, regardless how well constructed and how safe the strategy might look by design.

So... what is the best trading strategy to one person is not for another. Therefore, there are so many out there that work but it doesn't mean we ought to trade all of them. The most critical question I think we need to ask ourselves as we evaluate all these possibilities is what is the "underlying principles" of the strategy. Are these principles congruent with our needs. Once you understand that, choose the one that is most suitable to you. Trade it consistently and after a while you will be able to make enhancements to the strategy and make it your own strategy.

Hope this helps.

 

[tom]

At the end all strategies will work if marker stay in range.

Bsp, yes they all work if it stays in a range, question is how much will each strategy give back when it doesn´t stay in a range? Like many here I spend most of my time backtesting strategies in the tough months, e.g. Aug 2015, not the easy periods. So you need to understand the resillience of a trade. This in turn gives you confidence to remain systematic through melt-ups/downs. Example would be how well vanilla iron condors did...until they didn´t. Not a resillient trade.

To expand on Kevin´s post above, it´s taken me years to learn & accept I simply don´t trust the software predictions on close to the money butterflies. Feel nauseous when I see the notional value of a trade varying by 100s of deltas depending on the volatility model and changes in skew. Thus I could never stick to the plan and bailed too early. Found an alternative that works for me psycholoigcally (well, copied others with much more experience). On that note this site is brilliant, the experience:humility ratio is sky-high and if you just follow the good guys you´ll do well.

Posted by DavidF

 

[Marcas]

one would have to leverage up by using portfolio margin. Again, that's another no no for me. Using high leverage in order to boost up yield is a red line that I will not cross, regardless how well constructed and how safe the strategy might look by design.

Kevin, you mentioned above couple times. Can you say a little more on this subject. Your opinion is valuable.
For long time I sticked to this mantra and in consequence I didn't trade large just because mixture of risk and my style of trading was to dangerous for my liking. Now I try leverage, very conservatively, and just looking around while stepping in this area. Do you base your stance on some studies, on some facts maybe (plenty of them) or is it mostly personal opinion?

 

[Kevin Lee]

Kevin, you mentioned above couple times. Can you say a little more on this subject. Your opinion is valuable.
For long time I sticked to this mantra and in consequence I didn't trade large just because mixture of risk and my style of trading was to dangerous for my liking. Now I try leverage, very conservatively, and just looking around while stepping in this area. Do you base your stance on some studies, on some facts maybe (plenty of them) or is it mostly personal opinion?

Marcas,

My opinion is based on my personal experience. I have been through margin calls before and they weren't pleasant experiences. Brokers can increase their margin requirements overnight without explanations. While those were unpleasant experiences for me, I have known personal friends who got wiped out completely because of their over-leveraged positions. I have been through several market meltdowns - 1997 Asian financial crisis, 2000 dot com bust, 2008 global financial crisis. In every one of these, I knew people who got wiped out. These are very intelligent and once-successful people. Couple of them went from positive tens of millions to negative. All due to over leveraging. Those are life lessons for me and the reason why I made a promise to myself never ever to get caught in that mistake. If the trade off is sub-optimal returns, then let it be.

If you have read the story about LTCM, again that collapse was due to over leveraging as well. More importantly, before they got hit, people in LTCM were viewed as geniuses, and their strategies were considered super safe. As yield became smaller and smaller, they convinced themselves that they had a low risk strategy and hence they increased leverage. Of course, as the saying goes... the rest is history.

To me, a highly leveraged strategy is like playing Russian roulette with a gun with 1000 chambers. Although the chances of getting hit is extremely small, but if the cost of getting hit is death, then my decision is not to play the game. The end-result is less profit but I'm guaranteed to not have to deal with a consequence that I'm not prepared to accept. Therefore, I made it a red line. I try not to even analyze the decision too much because the more I analyze, the more I could rationalize away the risk and convince myself perhaps this time it's different.

So that's very much a personal decision. Many people will disagree and that's perfectly fine. But having said that, what I'm talking about is highly over-leveraging, meaning leveraging 100% to even 1000% of your capital. Those are the cases that will get us into trouble. Occasionally, if we need to slightly go over our capital temporarily, personally I think those kind of leverage is fine.

 

[Meathead]

Kevin - do you utilize a hedging strategy for your nearer the money positions? Or do you rely on position sizing?

 

[Harry]

To me, a highly leveraged strategy is like playing Russian roulette with a gun with 1000 chambers. Although the chances of getting hit is extremely small, but if the cost of getting hit is death, then my decision is not to play the game. The end-result is less profit but I'm guaranteed to not have to deal with a consequence that I'm not prepared to accept. Therefore, I made it a red line.

Agree with all of your comment and especially the highlighted part - a) it eventually may get you, and b) you need a red line. Personally I do not use leverage now, but if I did I will go up to max 110% of account - 100 is mine, 10 is brokers ... but that will be in something low risk, as of now I am in high risk trades so utilizing about 25-30% of account.

 

[Kevin Lee]

Kevin - do you utilize a hedging strategy for your nearer the money positions? Or do you rely on position sizing?

No, not in the form of black swan hedges that was a popular discussion few months back in this community. I would very much like to but find the cost too high. So, yes, i limit my trading size to a fraction of my total capital.

 

[Marcas]

Kevin,
tanks for your thoughts. They are not strange to me; I heard many times in my education: do not use leverage in trading. As I see it today it was very sound advice that probably saved me money.
Nevertheless I'm willing to try out this path. I'm well (at least I think so) aware of risks of overleveraging, maybe, because of that my experience so far is quite opposite to what you described - I earn less comparing to near ATM trades but I feel much saver. Obviously I see temptation of 'going all in' but so far I vision of downside prevent me of doing so, even if my T+0 line looks quite well. So for me: I'm accepting lower income to be in safer trades. Trading PM allowed me also to allocate more time to development of my trading tools and myself. as well I think general rule applies to both types of trading: don't expose yourself to devastating loses. Only problem is to recognize real risk.

As per LTCM, as far as I know they did really crazy things based on model and I see it as confirmation of my approach - models are useful but don't confuse model with reality. Speaking of: I'm very interested in your work on using machine learning to do Skew adjustments. I hope you will drop some info here from time to time.
all the best

 

[Luke]

I'm not a very experienced options trader when it comes to the more complex strategies that exist on this forum and all over the web, but I'll add my response here. I think the need for all of these strategies is that traders need an edge. The strategy is designed to exploit an edge and on this forum, the strategy is designed to exploit a statistical edge. I am so impressed by the statistical and probability evaluation tools and knowledge here, but it all comes down to finding a way to win more than you lose and keep the total sum of your winners higher than the sum of you losers.

It's all about finding and exploiting a trade that has a positive expectancy and/or managing a trade so that it has a positive expectancy. Look over the two attached files to go over probability and expectancy and watch this presentation: https://members.capitaldiscussions.com/go/u.ff2/fid/1741/hash/4EC1342CEBB4A90AC008.html.

These are very helpful in understanding a bit more about what is the edge and how do you find out if your trade (or the income trade you want to follow) will have a positive expectancy. DGH has posted the Options Risk Calculator and there was a round table in the last two weeks about using it. All of these will help you see the need for so many strategies: there is no trade that always wins all the time, so which trade can you get the hang of so you can have a system and decision making process for regularly taking profits and regularly exiting losing trades? As you watch presentations (and I highly recommend you watch at least the beginner sessions and the Trading Group 2 sessions), notice how often adjustments, entries, and exits are based on traders feeling a certain way or what their risk tolerance is. You can't always expect a rule for each trade or system, so you'll have to feel your way into a trade and around it once you're live. The other thing I've noticed is that the income trades always tend to change a bit over time. Why is that? The markets are also changing and there will likely come a time when your edge doesn't work anymore and you'll have to adjust.

The journey is long and arduous, but it is rewarding if you stick with it. Keep pressing and learn as much as you can, as fast as you can, and go back as often as you can to refresh what you've learned. If you're like me - start live trading once you understand the fundamentals: ready, fire, aim. Last point: Have a 5-10 year view on this and keep moving forward.

 

[DGH]

Hi Luke. Your thoughts are well-chosen and explicitly expressed. I noticed that the Expectancy PDF is a presentation I did many years ago while I was a mentor at another venue. The source heading on the PDF file says it came from SMB Options Tribe Meeting. I did not give this presentation to Options Tribe. How did SMB get it? It's not a problem for me, but I am curious to know how they got it. Also, it has the Capital Discussions logo on the slides and, to the best of my recollection, I did not do this presentation for Capital Discussions. It may be that someone at CD borrowed my slides, which is fine with me, but I am curious about the Options Tribe heading. I do not have and have never had an affiliation with SMB. Just curious.

 

[Luke]

Hey Dan,
I am nearly positive that I got it from the library or a resource here because I am not a member of any other site and haven't done anything with SMB. I thought that it was part of the expectancy presentation, but when I went back, I didn't see it. I saw the SMB logo as well and I wondered if CD and SMB partnered on some things, but just wasn't sure. Very detailed presentation, so excellent work!

I'll keep looking to see if I can find where I downloaded it...

Hi Luke. Your thoughts are well-chosen and explicitly expressed. I noticed that the Expectancy PDF is a presentation I did many years ago while I was a mentor at another venue. The source heading on the PDF file says it came from SMB Options Tribe Meeting. I did not give this presentation to Options Tribe. How did SMB get it? It's not a problem for me, but I am curious to know how they got it. Also, it has the Capital Discussions logo on the slides and, to the best of my recollection, I did not do this presentation for Capital Discussions. It may be that someone at CD borrowed my slides, which is fine with me, but I am curious about the Options Tribe heading. I do not have and have never had an affiliation with SMB. Just curious.

 

[tom]

It's all about finding and exploiting a trade that has a positive expectancy and/or managing a trade so that it has a positive expectancy. Look over the two attached files to go over probability and expectancy and watch this presentation: https://members.capitaldiscussions.com/go/u.ff2/fid/1741/hash/4EC1342CEBB4A90AC008.html.

Just an FYI. You can't share the links with the hash in it. I take a few things from your logged in user to generate the hash so the url will only work if the person who got the link is logged into the member's site.

UPDATE: Here is the recording

 

[Luke]

Got it - thanks, Tom.

So the presentation is the 25 May 17 Beginner Trading Group presentation on risk/reward and expectancy. Check it out @Bsp

Just an FYI. You can't share the links with the hash in it. I take a few things from your logged in user to generate the hash so the url will only work if the person who got the link is logged into the member's site.

 

[Luke]

Hey Dan,
I just found the expectancy presentation that I linked and it was in the documents section of the RTT alerts page. Sorry! I have downloaded so much from the site that I forgot where things came from. I'll be more careful about sharing info behind the paid wall.

 

[DGH]

Thanks, Luke. Much appreciated. We do try to keep our proprietary documents "in house", and some documents are only meant for paid subscribers...like you. I know that some presentations I have done in the past are still floating around, and that is probably unavoidable. If I were more formally engaged as an active educator I would probably take additional measures to protect "my stuff". I think that Tom probably captured my expectancy presentation from the other venue (with which he was also associated), converted it to the CD logo, and posted it on our web site. All fine with me. However, I never authorized SMB to take any of "my stuff". They had approached us about selling our RTT rights, but we declined, of course. I know that my weirdor strategy has been essentially copied and renamed several times by other groups. As you have learned, there is really nothing "new" in the options world. It's all PUTS and CALLS. However, the nuances of setup and management are unique. That's how traders build an edge. If you studied my sample games of chance in the expectancy PDF, you know that casinos and carnivals build their edge. By contrast, we build our edge with carefully constructed setups and good risk management.

 

[AndrewS]

The game we play is really very simple. 1) Create a structure that generates profits from time decay. 2) Place that structure somewhere, usually below the market to some degree. 3) Hedge off any undesired risk, usually to the upside. 4) wait for time to work, 5) If the market moves then make adjustments to restore the desired position or exit. 6) Harvest profits or take the loss. 7) Repeat. There are MANY ways to play out this game depending on how much experience, available time, risk tolerance and capital you have. The best thing to do is look at a bunch of them, back test a few and pick the one that seems best fitted to your circumstances. Start live trading with a very small position, perhaps using IWM or SPY just to gain experience before moving to the RUT or SPX. Stay away from the NDX unless you really like living on the edge.

 

[GH13]

The game we play is really very simple. 1) Create a structure that generates profits from time decay. 2) Place that structure somewhere, usually below the market to some degree. 3) Hedge off any undesired risk, usually to the upside. 4) wait for time to work, 5) If the market moves then make adjustments to restore the desired position or exit. 6) Harvest profits or take the loss. 7) Repeat. There are MANY ways to play out this game depending on how much experience, available time, risk tolerance and capital you have. The best thing to do is look at a bunch of them, back test a few and pick the one that seems best fitted to your circumstances. Start live trading with a very small position, perhaps using IWM or SPY just to gain experience before moving to the RUT or SPX. Stay away from the NDX unless you really like living on the edge.

This post is spot on. I have spent years trying to build a better mousetrap but yet it always comes back to the process described above. The trick is sticking with it and not trying to outsmart the trade rules or market. Every larger loss I have had is not sticking to my rules/adjustments when the market refuses to accept my opinion of where it should be going. Just like every youtube video of someone getting hurt doing something stupid starts with "Hold my beer", every large option loss starts with "I will just wait a little longer before I adjust, this market can't keep going up/down/etc."