Martin, comments below...
-----Original Message-----
From: OptionClub@yahoogro
Behalf Of janzen257
Sent: Tuesday, July 07, 2009 3:39 AM
To: OptionClub@yahoogro
Subject: Re: [TheOptionClub.
--- In OptionClub@yahoogro
> [...]
> 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.
[mc] risk is always relative - relative to reward. The point I was trying to
underscore is that the basis of this "system" is short term directional
bets. If that is the whole foundation of the system and options are used to
play that strength, then the best option strategy should be chosen. To me
that is a high gamma, 100 delta play and if that's the case you may as well
just play the long stock.
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.
[mc] maybe, maybe not. If the system is directional and short term, as I
suggested a 100 delta strategy is optimal. If the play is longer term,
limited risk and directional, there are many, many strategies that fit the
bill: otm flies, verticals, plain long otm calls, and so on. My point is
that if you play options this way then choose the optimal strategy for the
desired outcome which means finding the best leverage and best reward for
risk. buying a 70 delta option to make a $0.10 profit is a colossally poor
reward for risk strategy in my opinion and probably worse than just plain
long stock since the bid/ask spread and delta of the ditm means you can
guess right and still lose on the trade where a plain long or short stock
would be in and out quickly and successfully.
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?
[mc] it doesn't have to get complicated (not that these are very complex
anyway) but it does entail knowing what factors contribute or hinder your
ability to profit from whatever you are betting on and using as your trading
tool.
(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?
[mc] in fact every trade is an explicit perspective on the market. You are
either long or short direction and/or volatility with any position. I'm not
denying that or saying that I am unaware of what my position can benefit
from or be at risk to. It's just the opposite. With any trade I am acutely
aware of what needs to happen for me to be profitable and I am probably even
more vigilant on what can go wrong. But that doesn't mean that I enter some
trade because I am hoping or predicting something will happen. It's just the
nature of the beast much like the initial draw in a poker game has a certain
probability of winning. It's not the cards you get or the initial option
position you select that wins. It's how you play either. I can win a poker
game with a pair of deuces just like I can win an option trade with a long
otm put. They may both present "low probability" chances, but the point is
to make something out of them by subsequent play. And don't come back with
"but if I can choose to start with a pair of aces I have a higher
probability of winning." Of course that's true in poker but there is no such
thing as a "high probability hand" in options. Every single trade offers
about a 50/50 shot at winning. If you see that (and agree with me) then it
all comes down to how you manage the trade after entry - regardless of what
you start off with. condors or other short gamma trades have nothing to do
with it despite what others might say (or sell). It's all about learning to
trade. You won't learn to trade doing those condors since 80%+ time they win
and 20% of the time you are left wondering what happened. In my opinion it's
much better to try your hand at an active strategy that forces decisions and
actions. That's just my opinion but a position that always forces you to
fight for a profit will be as good a teacher as any guru out there.
Best,
M
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