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-----Original Message-----
From: Ricky
<...>
First question is: are you actually trading this, with a real time
simulator or with real money, or are you reporting an EOD analysis of
something you might have done during the trading day? So are the
given debits and credits based on something your broker reported as
part of the execution or are they based on the market bids and asks of
EOD prices?
MC - paper trade based on EOD day bid/ask prices. (Sam started the initial
trade and I'm just tweaking to demonstrate some thinking relative to the
original questions regarding "how to trade" vega.
With the last trade, what exactly was the calculation you made to
conclude IV was falling? I didn't see that happening. Do you always
avoid buying premium in falling IV and avoid selling premium when IV
is rising?
MC - I look at atm IV and +/- a few strikes to assess what's happening to
IV. I look at the prices of butterflies using all bid or all ask and see
what happens day to day. As far as buying rising IV and selling falling IV
that is a general practice though the particulars of a specific position
will always rule the day for my actual trading. Again this is an artificial
example really to foreground how to look at and integrate vega into trading
decisions.
I still am miles away from understanding how you choose your trades.
Comments you make like, "I'm adding some negative deltas here" or
"gammas there" don't give enough detail to see what your method is.
MC - sorry if I am too cryptic or sketchy in my descriptions. But the
basics should be available to an intermediate options trader. For deltas
it's simply a matter of looking at the respective delta calculations of
individual strikes and puts or calls then seeing if I am long or short the
options. Example: if I sell one 30 delta call and buy a 25 delta call plus a
15 delta call, in aggregate I am long deltas (-30+25+15 = +10). An option
calculator should help for someone where the deltas are not obvious. The
same with gamma though I will sometime use the term gamma to mean that I
have added net extra long units. So again as an example, buy selling one
call and buying two others I have added gamma since the net units are +1.
None of the traders Chris has brought in to lecture us, or books on
options trading, explain trades as difficult for the ordinary trader
to fathom as what you are offering. For example, do expiration graphs
play a role in what you are doing
MC - an expiration graph should greatly help you see what I am doing
From what you have said in the
past, I got the impression you have a goal of a risk free expiration
profit graph by sometime in expiration week. However, in the first
couple of trades that goal isn't evident.
MC - yes that is my goal generally. With this trade I am trying to do
something more educational than to just wind up with a winning trade. If I
had the original bwb as a starting position I would have simply left things
at the butterfly for a ten cent debit on the first adjustment. But to
underscore some of the vega issues and to complement the negative delta bias
of the original trade, I have continued to flesh out the trade with those
issues/perspectives in mind.
The expiration P/L of the starting BWB had a 6.20 profit at 155 and a
3.80 loss at 165 and above.
The 4/26 modification had a 5.85 loss between 140 and 145, .85 loss at
160 and above and a profit of 4.15 at 155 with profits exceeding that
below 130.
The 4/28 change had a 8.14 loss between 140 and 145, 3.14 loss above
160 and 11.86 profit at 155 with higher profits below 120.
So right now, you seem to concentrate on making the expiration graph
very profitable at the current market price but are not worried about
eliminating risk a short distance away.
MC - I'm always worried with any risk to a trade. But in general I will tend
to try to deflect risk away from wherever the current price of the
underlying is. Even with a directional bias as I've maintained in this
trade, it is typically imprudent to try to force a trade to do what you
think is going to happen. For all intents and purposes, the atm price is
what everyone agrees is the proper value. If and when that consensus
changes, then it is time to change with the consensus.
One thing I notice is that
you haven't taken on unlimited risk, at far off GS expiration values,
by selling naked. Is that a general policy?
MC - as with any trade, it all depends. In a demonstration like this where
there might be less experienced traders trying to follow along I think it is
prudent to try to always have a position where the max risk is capped. Even
in my real trading I mostly try to end each day with a capped risk scenario.
Is there a general
principle that gives you confidence that the local risk is going to
eventually go away?
MC - it's probably just long experience but basically I look at options
almost solely from an extrinsic premium perspective. I like to sell the
richest extrinsic premium and hedge with cheaper extrinsic premium. I then
manage a position and the intrinsic premium by trying to keep a cap on my
delta risk exposure.
Is there some rule you use to "grow the position"
without taking on too much risk?
MC - I focus on position sizing obsessively. But I also understand that over
time a position will grow in either trying to defend it or because it is
working out well. "too much risk" to me means that the trade can sap more
than a couple percent of my trading capital if it completely fails. So as
long as my position size accommodates this level of risk I am okay and in
fact I treat the trade as though the max loss will occur. Psychologically
this works for me personally since if I accept the max risk then all I need
to really focus on is making the thing somehow profitable despite that max
risk potential.
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