Sunday, October 30, 2011

10/30 Weekly Summary

The market seemed to be in a wide range with an upward bias. It seems we had quite a few days with over 1 standard deviation moves last week and the intra-day movement has continued to increase. While the NDX did not move up or down by too much this week it sure did move around. I have a few cash-secured puts that are about to reach their max profit so I may take them out sooner than planned and wait a few days to get back in.

As I have mentioned, I started backtesting a version of the iron butterfly without a lot of adjustments, basically the only adjustment is a consideration at the beginning of the trade about loading all contracts at once or loading contracts in a scaling fashion (start with 1 lot and add others if the first lot gets into trouble). So far the results are looking interesting and I'll do a few more months of testing and am looking to get a small position in December contracts to get back in the iron butterflies.




Anonymous said...

I think putting the same trade on, be it a butterfly or calendar, month after month, is a losing proposition over the long term. IMO, you should only place a trade when you have an "edge" which can be mispricing of an
option or volatility skews for the same month or different months. One month there might be a good set up for a calendar, another might be a iron condor or butterfly. Check out
Mark Sabastian from "options pit". He talks about this.
Also, think about this, how many hedge funds do you see trading butterfly spreads every month.

Gustavo's Trades said...

We may have to agree to disagree to some degree on that one. Exploiting mispricing because of volatility is certainly a great edge and it happens more often than not.

What I don't quite agree is that the consistently entering the same strategy is a losing proposition. The key is picking a strategy that allows for you to handle whatever the market throws at you. This is the reason why I stuck with the Butterfly as my strategy, I think that it allows for a lot of flexibility when adjusting.

Here is what I found with all the strategies I've traded thus far, note this is my opinion only, not advice nor recommendation:

Iron Condors: This seems like a safe trade, with a wide range. Yet, whenever the market starts to move around your position goes under water quickly and there is little room to adjust.

Double Diagonals: I personally preffer these trades in lieu of the iron condor. You have a few adjustments you can make and they seem to stand wide market movements a bit better than their iron condor equivalents.

Iron Butterflies: Obviously I'm biased because that's what I traded the most by far. That being said, the reason I do so is because it allows to handle a wide variety of market movements.

Calendars: I have little experience with calendars. But have started to wonder about using the triple calendar strategy on IBM. I have watched one of Dan Sheridan's students do it and he did it quite successfully for a long time, again, based on his consistency.

Learning the volatility and figuring out what trade to use depending on what the volatility is "saying" seems like a good idea, I will venture to say this is probably much harder than it seems. I like Mark Sebastian, never been to his "Options Pit" training, but he was a good instructor when he was with Dan Sheridan.