Here's a question we received recently from a client, asking about the relationship between the vertical spreads we trade in the ETF Trend Options strategy and the iron condors associated with our...
Felix Salmon is skeptical about the ability of average investors to protect themselves from major economic risks:
[T]here really isn’t an easy or obvious way for an investor to be highly risk-averse in this market, not when one of the biggest tail risks that people want to protect themselves against is inflation. Big investors can try taking the Taleb approach of buying large numbers of out-of-the-money options and reckoning that a bunch of them will pay off when the next…
Subscriber ATB raised the following insightful question in response to my comments in the July Monthly Review:
In the July monthly review you state that you don’t want to assume a stock picker’s attitude and try and pick the direction of indexes, but rather make predictions on future volatility. I also agree with this belief that no one can pick the direction of stock movements with any discernible edge. My question is why do you think you…
In my last post on this topic, “Why Delta Hedging Matters,” I argued that an essential aspect of options trading is hedging away unwanted risks. For most traders, the unwanted risk is usually to directional price movement, or delta risk. We discuss this issue in the context of trading iron condors a fair amount on the members area of the site, but the principle is just as important whether you’re short one call contract or managing a book of…
Define a binary strategy as a set of conditions that takes one of two possible values,* typically a long or short position in the asset being analyzed.** Define a polynary strategy as one that takes at least four possible values, with the maximal value limited only by the precision of the analysis, depth and liquidity of the market, and prudence. So where a binary strategy may regard a given data point and return a 1, -1, or possibly 0, the…
Today’s losing trade can be tomorrow’s saving grace.
The graph below plots the risk profile for the trades we currently have open in our iron condor newsletter. The curved white line represents profit/loss today at various SPY price levels; the other lines move forward in time, with the final line plotting p/l at expiration. This graph doesn’t model changes in implied volatility, although since we are short vega, profits will rise inversely to implied volatility.
We’re not shy about…
A reader asked us recently about our preference for closing out option spreads prior to expiration. To review, we usually close out any positions that are short gamma at least a few days – and often up to a week – before they expire, since the exponential increase in gamma near expiration makes those positions more difficult to manage. The question was about the how the performance of our strategy would have been affected had we held all positions…
Last month we made important changes to the Calendar Options service—changes aimed at reducing the odds of taking a loss like we did in January. The most significant change was to expand the scope of the newsletter, at least temporarily, to include double-diagonals, so that we’d have more opportunities to enter trades even when implied volatility is on the high side. (For readers unfamiliar with this exotic-sounding strategy, we’ve just made an excerpt from a Calendar Options post introducing the…
The conventional wisdom about iron condors and other market-neutral option positions goes like this: “These strategies are profitable when markets are not trending in one direction. They are unprofitable during strongly trending markets.” Even Investopedia opts for this one-dimensional explanation:
This strategy is mainly used when a trader has a neutral outlook on the movement of the underlying security from which the options are derived.
There are two problems with the conventional wisdom. The first is that…
To review, the Sharpe ratio is a measurement that tells us the risk-adjusted performance of a portfolio or strategy. It is calculated by subtracting the risk-free rate from the strategy returns and dividing that by the standard deviation of returns. The idea is to determine whether absolute returns are due to some desirable feature of the strategy or simply due to excess risk-taking.
Not all Sharpe ratio figures are created equal. To be more specific, one should be careful when…
One of the trading myths we noted recently has generated some questions. There seem to be some passionate proponents of applying technical analysis to leveraged ETF charts out there, and while that notion has already been debunked elsewhere, we thought we’d take a different approach, just for fun.
Here’s an argument in favor of technical analysis based on support and resistance. Define “support and resistance” however you wish, as long as the definition has to do with price behavior…
Tuesday, July 31, 2012
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