Archive | Strategy

Same trade, different reasons

Tuesday, July 31, 2012

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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...

Predicting Price and Volatility

Thursday, July 23, 2009

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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…

The Lazy Guide to Delta Hedging

Friday, July 10, 2009

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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…

Binary and Polynary Trading Strategies

Monday, April 27, 2009

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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…

Options, Timing, and Risk Management

Tuesday, March 31, 2009

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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…

Holding Options to Expiration

Tuesday, March 24, 2009

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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…

Everything You Know About Iron Condors Is Wrong

Tuesday, February 17, 2009

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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…

Meaningful Sharpe Ratios

Friday, February 13, 2009

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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…

An A Priori Argument Against the Technical Analysis of Leveraged ETFs

Tuesday, February 10, 2009

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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…

Beta and Risk in Troubled Markets, Part 2

Friday, January 16, 2009

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In this mini-series, we’re examining the value of beta as a measurement of risk.  In this post, we want to examine how the betas of some popular stocks, indexes, and ETFs changed during 2008 and especially during the fall crash.  First, we should clarify exactly what we’re measuring. What is beta? Beta is metric that describes the systemic risk of an asset or portfolio.  Because it is not possible to alleviate all risk by simple diversification, investors and traders…

Beta and Risk in Troubled Markets, Part 1

Thursday, January 15, 2009

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The old maxim is that when major market movements occur, all betas go to one.  We decided to look at the beta for a few stocks during 2008 to determine whether and to what extent that maxim held true. The reason we wanted to investigate the beta exhibited during 2008 – and especially during the fall crash – is that investors and traders use beta as a measurement of how risky an asset is relative to the market, with the…

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Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More

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