1. First of all I hope that the results will cause those who rely on
putting on ordinary ICs every month, to consider that maybe they
shouldn't be married to that methodology.
2. I hope that somebody familiar with back testing software for
options will comment on whether the discussed test could be run easily
using what is available.
3. I think the test barely scratched the surface as to what could be
done with a reverse IC (combination of put and call debit spreads).
The only adjustment approaches that were considered were doing nothing
and converting the in the money side to a fly. Michael Catolico's
Vertical Adjustment Techniques.pdf, in the Files section of this
group, mentions three other "offensive" techniques to be used when the
spread goes in the money: go long at the short strike, convert to a
condor and roll the spread a strike in the direction of the market.
The latter enables you to take some profits and be set up for more if
the underlying goes in the same direction.
4. The aforementioned pdf also has 8 defensive techniques for
adjusting a spread that has gone further out of the money. I have had
much difficulty in understanding the comment under the "When to use"
column that the first 6 should be done for a credit, at least equal to
the cost of the spread. If the spread has gone further out of the
money from the time you bought it, it seems highly unlikely that you
can get that much credit for those operations.
This month I am again paper trading the 5 tickers I used in last
month's test, but this time I will try to use a greater variety of
adjustment techniques. On Monday when GOOG was around $545, I entered
the following reverse IC ( 2 contracts at each strike).
-530P + 540P + 550C - 560C @7.40 debit
Today when GOOG was around 520, I made the following adjustments:
+510P -520P @ 3.60 credit (see the next to last adjustment of
Michael's paper) yielding a condor on the put wing, and
+540C - 2*550C + 560C @ 1.00 debit (see the 8th adjustment in the pdf)
rolling down the call spread a strike. The current position is now:
+510P - 520P - 530P + 540P + 540C - 550C
I am attaching an expiration P/L diagram showing the original position
and the two adjustments. Should I have left the position, which was
in the profit zone, alone or do these adjustments improve the
position? Or was there a better pair of adjustments? I wish had a
theory to tell me. I made the maximum possible loss less than in the
original position, narrowed the loss area in the middle and increased
the profitability in the area where the underlying is now. But I
caused a downside exposure.
All the more reason to paper trade until you are sure you know what
you are doing. :-)
Attachment(s) from Ricky Jimenez
1 of 1 Photo(s)
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