Thursday, September 10, 2009

[TheOptionClub.com] Re: Charles Cottle Presentation

 

--- In OptionClub@yahoogroups.com, "mcatolico" <mcatolico@...> wrote:
> First of all a graph may show you where risk lies - but usually only
if you
> push the date to the nearest expiration. however that graph doesn't
tell you
> a thing about how to address the risk.
> [...]
> In my opinion, unless you want to treat trading like a fun, minor
diversion,
> sooner or later you need to absorb the challenges of trade dissection
and
> incorporate those skills into your trading game,

This discussion on position dissection comes at a very good time. I've
been practicing some of your techniques, and things can get complicated
rapidly. Here's a short example...

09-03: SPY at 100; started with a -100p/+99p vertical spread for 0.44CR,
max risk -$560.

09-04: SPY up to 102; added a -102c/+103c/+105c ATM ladder for a small
credit. Now it's an iron condor, with some long gamma on the upside.

09-09: SPY up to 103; added -103c/-103p/+101p to the 105c, to complete
an iron butterfly for a credit, cutting max risk to -$280. Ok, I'm
starting to get what the long gamma is for!

09-10: SPY above 104.50; took advantage of today's rally to close the
original 100p/-99p spread for only 0.08DB, then added a -105p/104p
vertical.

The result is a "risk-free" position: 101p/-102c/-103p/104p/105c/-105p,
with a minimum profit of $160 (minus heaps of commissions). Nice; I
like this approach! But it's getting hard to draw the risk graph in my
head...

However, after going back over the first couple of chapters of OT:THR, I
can see that by adding a long 102/105 box (102c/-102p/-105c/105p), this
mess turns out to be a simple put condor (101p/-102p/-103p/104p) --
exactly as the ToS risk graph shows. Or, by adding another short
103/104 box (-103c/103p/104c/-104p), it's an iron condor
(101p/-102p/-103c/104c). Haven't figured out the "baby butterflies"
yet, but still, this is very cool!

Now it's time to figure out what's next. I know that I can just
continue to follow SPY, by adding butterflies in order to widen the
condor if necessary. But there's no long gamma left to work with any
more. Does this maybe call for adding another zero-cost ladder
somewhere? In other words, is there a good way to improve on a "free"
condor, without messing it up too badly?

Martin

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