Yes this is one easy (easier?) way to do things. Basically when I trade, I
am looking for "free" options. Whatever position I start with, there a at
least a few ways to extend the trade while holding it risk free.
A butterfly (as James points out) becomes a strangle when you buy in the
body. So if I start, as he suggests, with a ten point iron butterfly
130/140/150 for -I'll toss a price in for illustration - say $7.00 credit, I
am looking for some future chance where I can buy back the 140 straddle for
less than $7.00 debit which will leave me with the strangle for zero debit
or better.
If I have a vertical - say the +140c/-150c for $3.00 debit I will look to
convert this into a roll to a higher vertical (e.g. +150/-160) buy adding a
short fly for a $3.00 or better credit or move the trade to a risk free
butterfly by selling the -150c/+160c vertical for $3.00 credit or better.
This is what I mean in the "cheat sheet" I uploaded to files section ages
ago showing how to convert verticals "opportunistically."
It's not as analytical as dissection but it still takes a bit of focus to
try to spot opportunities to convert a winning trade into something risk
free.
The reason I trade this way is that I think a simple close of a winning
position is bound to wind up making for an account that basically goes
nowhere. It's when you take your winnings and maintain the potential for
additional gains that real success starts to accumulate.
When a trade heads south, the whole game for me is to modify the position so
that the reward for risk stays relatively constant and/or the chance of
making money is improved based on where the underlying trades relative to
the position. so for instance with that +140/-150 call vertical above,
let's say the underlying moves down from maybe 136 to 131. I could sit and
pray and hope that the underlying comes back or I can a) do something that
improves my chances if it does comeback like roll the trade down to
+130/-140 or b) I can stop trying to be bullish until the market convinces
me that bullishness is the way to go by moving the trade to something more
neutral like +120/-2 130/+150.
It's somewhat mechanical but it's not exactly paint by numbers. You need to
keep throwing away your ego (whether your position was originally right or
wrong) and just learn to trade where things are until proven otherwise. The
mechanics are pretty simple, again: sell local, buy remote.
-----Original Message-----
From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On
Behalf Of JP
Sent: Sunday, May 23, 2010 1:50 AM
To: OptionClub@yahoogroups.com
Subject: [TheOptionClub.com] Re: GS TRADE [was:How do you manage your Vega?]
Ricky
If you take the concept of selling off butterflies and extend this approach
a little it may help to see how Michael converted his position on 18 May
from a Butterfly type spread to a strangle.
1. Assume your position is a 130/140/150 Iron Fly [+1p 130 / -1p 140 / -1c
140 / +1c 150]
2. You want to sell off the butterfly, so look at trading -1p 130 / +1p /
+1c / -1c
3. you realise that the 130p / 150c are either too cheap to sell or you want
to retain some leverage in the wings
4. therefore you just buy the Fly Body [+1p 130 / +1 c 130]
Whereas, Michael does this kind of trade instinctively, the rest of us
probably need some sort of logical framework that works from first
principles; which is where position dissection comes in handy.
Cheers
James
--- In OptionClub@yahoogroups.com, Ricky Jimenez <rickyjim@...> wrote:
>
> On Sat, 22 May 2010 18:58:55 -0000, "JP"
> <jamesbparker999@...> wrote:
>
> >Ricky
> >
> >Difficult to say where you would get most benefit from Cottle's book
without knowing your trading style ... maybe useful if you posted some sort
of sample trades and we could start there ... like you, I don't find the
concept of selling off embedded flies very practical ... but it is based on
exactly the same concept when Michael says that the priority during expiry
week is to buy-in risk ... and if you take Michael's last adjustment he
effectively converted a fly into a strangle ... equally dissecting out the
flies is done to reveal residual risk that is often non-transparent and can
be dealt with quickly when the opportunity arises ... if I had to make a
suggestion, from memory, I would go with the chapters on verticals and
wingspreads ....
> >
> >Have a good weekend
> >James
> >
> The last GS trade, I think, was quote different than selling off baby
> flies. The former averaged out a very profitable with an unprofitable
> section of the graph between 130 and 150, resulting in a completely
> flat but profitable area with a profit between the previous large
> profit and smaller loss. Subracting off a fly usually makes a little
> dimple in the expiration graph of a larger fly while making an even
> smaller profiting effect on the entire graph. Flattening seems to be
> a more powerful technique.
>
> As for my own trading style, I have never been one for daily
> adjustments. So my interest in the GS trade has been of an
> educational nature. Mostly I do lots of small time (back)spread
> positions where the idea is to make good guesses at the beginning of
> the month and close out or rollover at the end. I am still paper
> trading reverse ICs and may even try some with real money soon.
>
------------------------------------
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Hey, thanks for the information. your post s are informative and useful.
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