I think Murthy said it but I'll repeat that this technique may not be for
everyone. But I'll add a couple caveats (call these comments another form of
hedge if you will).
First of all a graph may show you where risk lies - but usually only if you
push the date to the nearest expiration. however that graph doesn't tell you
a thing about how to address the risk. dissection is a building block
approach for constructing, reconstructing, disassembling and reassembling a
position. the mental effort and the working through process using an array
of option tools will teach you to find the right tool at precisely the right
moment.
And following off of this, the detailed drilling exercises that go into this
process can only make you a more skilled trader. By analogy, say you are
trying to improve your tennis game. You have a good forehand but a very
mediocre backhand. Practicing that backhand is a continual chore for you so
you much prefer to cheat your volleys to your stronger, easier forehand
shot. Sooner or later though you meet an opponent that sees through your
weakness and pounds away at your backhand. To be a winner at anything more
than a mild recreational game requires that you confront the tedious and
frustrating aspects of the sport, learn to master technique (and yourself
along the way), and advance your skills to the next level.
In my opinion, unless you want to treat trading like a fun, minor diversion,
sooner or later you need to absorb the challenges of trade dissection and
incorporate those skills into your trading game,
-----Original Message-----
From: OptionClub@yahoogro
Behalf Of vikas_basantani
Sent: Monday, September 07, 2009 8:25 PM
To: OptionClub@yahoogro
Subject: Re: [TheOptionClub.
Hi James, thanks for taking the pains to pick up the LOW position and
attempting to apply dissection to it.
First, as Steve and Ricky have mentioned in separate posts, there is
possibly an inherent flaw in your analysis. What you seem to have done is to
simply replace the two short calls with two short puts in the original
position - this is what has possibly led you to deduce that (+2 19 P/-2 21
P/-2 21 C) is equivalent to (+2 19 P/-4 21 P). As we know, this replacement
is not correct simply because short calls have unlimited UPSIDE risk whereas
short puts have unlimited DOWNSIDE risk (Ok I know that the stock can't go
below zero).
Second, as I see it, applying dissection to an original position can make it
simpler or more complicated. This can be easily seen in Steve's email where
converting the original position (+2 19 P/-2 21 P/-2 21 C) to all calls
leads to a simpler position (19/21 ratios) whereas converting to all puts
makes it a bigger mess.
Third, there is possibly nothing wrong with visualizing the original
position as as combination of flys and some short options but to me as a
retail trader, it sounds like an overkill. Let me clarify this further...
If I were a market maker and I had 1000s/1000s of long and short calls and
puts spread over different months, it probably makes sense to see the whole
mess as flys and manage them that way with the bid/ask edge on my side.
Even I if I was a retail trader who was trading 100s of contracts at any
time, it would probably make logical sense to see them as a combination of
flys and adjust them as flys as the stock moves (as the premiums will
reduce the effect of commissions and bid/ask spreads not being in my
favour).
But, as a retail trader who is trading just a few contracts at any given
time, adjusting with flys can get very costly due to the commission costs
and the bid/ask spread not being in my favour.
Finally, even if I convinced myself to see everything with the help of flys,
I still do not see any big benefit in doing as I can easily/graphically see
all the risk involved by simply using the risk/reward graph.
I am willing to take the dust off Cottle's book and spend months to improve
my own dissection skills but at this stage, I am not sure that it is worth
the efforts as a retail trader who is trading a small account with few
options at any given time...
I apologize in advance if I sound a bit rude on this post but just like
Ricky, even I am trying to find some solid reason(s) to use dissection to
improve my trading skills.
--- In OptionClub@yahoogro
>
> Viky
>
> Hi, I checked out your blog to see if we can apply any of Charles Cottle's
concepts to your existing positions .... let's take the position that you
have got on LOW;
>
> ------------
>
> +2 19P / -2 21P / -2 21C
> Max Risk: $170 on the downside
> Max Reward = $230 (if LOW closes exactly at 21 at Sept expiration)
> Break-even points = 19.85 and 22.15
>
> ------------
>
> You have legged into this position for a nett credit of $230.
>
> Either by using Cottle's dissection software or by dissecting manually,
you would remove the 2 x 19/21 boxes (debit $400) to leave you synthetically
with a 2x4 Put Ratio;
>
> +2 19P / -4 21P
> Synthetic Debit $170 [being initial credit $230 less $400 debit for boxes]
>
> You may find it easier to manage the position as a Put ratio than a short
straddle with put protection
>
> ------------
>
> Cottle would then go one step further and dissect the total position into
baby flies and remnants; in terms of LOW above that breaks down into
>
> +2 flies 19/20/21
> +4 flies 20/21/22
> +2 flies 21/22/23
> -1 put 23
>
> In terms of risk management, you can simply put out the fire by buying a
23 strike put.
>
> If the market ziz-zags between 19 and 23, you can sell off the baby flies
if the prices are attractive enough ... which will generally be if the
market is at the short butterfly strikes approaching expiration.
>
> ------------
>
> If the market takes off up or down you could adjust using one of Michael's
typical adjustments ..... adding a Fly or BWB in the direction of the move
... to create an unbalanced condor .... then dissect again ...
>
> ------------
>
> Once you get the hang of Cottle's stuff this becomes easier to understand
and apply.
>
> Hope that helps
> Cheers
> James
>
> --- In OptionClub@yahoogro
> >
> > Hi Chris, as I feared earlier, personally for me the presentation wasn't
any
> > easier to digest than some of the most difficult chapters in Charles'
> > book:-)
> >
> > Having said that, thank you very much for taking the pains to arrange
the
> > webinar. It doesn't happen very often that you get to hear from such
> > experienced traders and that too for free...
> >
> > May it is time that I revisited his book (bought a few years ago) to
make
> > another attempt at understanding/
> > etc...
> >
> > Happy loooong weekend to all...
> >
> > Cheers Viky
> >
> > http://options101.
> >
> >
> >
> > On Sat, Sep 5, 2009 at 7:21 AM, Ricky Jimenez <rickyjim@> wrote:
> >
> > >
> > >
> > > Chris, in the future, I hope you can suggest to the speakers, to
> > > explain their modifications by showing how they change the trade's
> > > expiration diagram. I think Charles assumed the viewers had greater
> > > vizualization capabilities than most of us have.
> > >
> > >
> >
>
------------
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