--- In OptionClub@yahoogro
>
> I didn't hear the presentation but I can maybe add a comment or two that
> might help understand the "market maker mindset." Mr. Cottle comes from a
> floor tradition. Once upon a time - surprisingly not that long ago - market
> makers had to manage their positions using a basic handwritten carding
> technique. With that method everything traded was resolved into a synthetic
> equivalent call or put unit plus or minus stock (or whatever the underlying
> happened to be) and marked on a trading card like so many notches on a
> chalkboard. Perhaps not so surprising is that this is still a very good,
> fundamental way to manage a dynamic position and to recognize where all your
> risk resides in a momentary glance.
>
> The reason why floor traders decompose positions into flies is that these
> are excellent ways to tell you just about everything you need to know about
> options. If you know how a fly behaves (e.g. how they change based on time
> and/or volatility) and how they are priced relative to each other you can do
> your job as a market maker (i.e. make fair markets without creating
> arbitrage situations or mis-pricings) and you can effectively see ways to
> attack any risk in your current position. further, changes in those
> relative fly prices tells you a great deal about the underlying
> supply/demand characteristics of the market.
>
> example: with abcde at 100 if you have the +95/-100/-105/
> decompose this into two flies, namely the 95/100/105 and 100/105/110 flies.
> If you recognize that the atm fly is at its max value then you can see what
> is (admittedly obvious) that the 95/100/105 fly is vulnerable to any price
> movement away from the 100 strike. Depending on the market and your net
> position cost, you may want to seize on any opportunity to close that atm
> fly. Further, if you want to hold onto the atm fly in anticipation of
> further theta accumulation, you can look to the cheap outside flies (or
> components thereof) as very easy ways to mitigate the risk of that atm fly.
> e.g. if you can see the put side flies starting to skew up in value, add the
> +90/-2 95/+100 fly to net into a +90/-95/-105/
> protect against some downside threatening movement in the underlying, and so
> on. With the stretched condor you have effectively added some downside gamma
> protection while retained the embedded value of the atm fly to bring in all
> that theta decay.
>
> It takes some getting used to when trying to analyze a position in this
> manner but the old coaching cliché of "drill to build skill" makes the
> effort worth it in my opinion.
>
>
>
> -----Original Message-----
> From: OptionClub@yahoogro
> Behalf Of Ricky Jimenez
> Sent: Sunday, September 06, 2009 6:11 PM
> To: OptionClub@yahoogro
> Subject: Re: [TheOptionClub.
>
> On Sun, 06 Sep 2009 17:17:28 -0000, "janzen257"
> <yahoo.to.mj257@
>
> >As for Ricky's request for risk graphs at expiration..
> same way; I think that this is how most of us envision our trades. But if
> you look at pictures of the CBOE floor, for example, and look closely at the
> hundreds of screens, you don't see any graphics at all -- no price charts,
> no risk graphs, nothing! Clearly that's not how the professionals manage
> their positions. I'm nowhere near ready to give up my training wheels yet,
> but it doesn't surprise me that someone as experienced as CC doesn't have
> risk graphs for his example trades.
>
> So what do you see on the screens? If a trader is always doing the
> same kind of spread, he knows what the risk graph looks like very well
> and can figure out where he is by checking a few numbers.
>
> By the way, I tried to understand what Cottle's dissection algorithm
> is, by reading in his book, and got nowhere. Can anybody here explain
> it? His books get enthusiastic reviews on Amazon but these reviews
> say little about the content.
>
>
> ------------
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Great explanation Mike, I am impressed with your PDFs on Adjustments.
may I post them on my web site?
CC
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