Tuesday, July 7, 2009

Re: [TheOptionClub.com] qqqq's



--- In OptionClub@yahoogroups.com, "mcatolico" <mcatolico@...> wrote:
> [...]
> For one, if the play is for a couple days why on earth would you use
longer
> term options? Get the biggest gamma and delta possible to play a
directional
> swing - that means just play with the underlying long or short or a
> synthetic combo (e.g. long a call/short a put).

That would get you more gamma and delta, but with (nearly) unlimited
risk. Let's forget about this particular video for the moment, and just
suppose that we were interested in implementing some sort of
trend-following system. In that case, buying a DITM call or put would
make a certain amount of sense, wouldn't it? It's a relatively
expensive option, sure; but it has limited risk, lower margin
requirements, and at least some leverage.

Or is there an even better way to do trend following with options -- a
ratio backspread, maybe, or a fancy Charles Cottle-style "wrangle" or
"slingshot" or whatever?

(I just finished reading "Trend Following", by Michael Covel, and am
impressed with the results he documents for some notable trend
followers. Unfortunately, I am just a bit shy of the $10M required to
have Dunn Capital Management do the work for me...)

> [...]
> As always, the key to success, in my view, has nothing to do
> with the set-up or the initial strategy.

Nothing? MC, I'm starting to see what you mean by this, I think. In
your adjustments paper you start with, say, a long call, then convert it
to a bullish spread if the price moves in your favor, or to a ratio (or
BWB) if it moves against you, with the expectation that the price will
come back eventually (and please correct me if I misunderstood).

But even here, you have an initial directional bias, don't you? I mean,
the adjustment to a bullish spread is easy, and reduces risk
immediately. I'd much rather be on that side than trying to fight my
way back using the ratio spread. Do you really not care which way the
price goes once you've bought your initial call?

I hope not; I don't pretend to be able to predict the future, and would
love to learn to trade in a completely direction-agnostic way! So far
as I can tell, this means either short-gamma trades like condors and
calendars, or trend-following systems which lag the price. Anything I'm
missing?

Martin

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