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Carl,
look for low implied volatilities, with a tendency to rise, preferably plus
a noticeable volatility skew - then you are in for a good backspread! Of
course, you want the market to move on your backspread, the more and sooner
the better.
I haven't done any backspreads for a few weeks now, because volatilities
were too high, and there were other opportunities. Now that vol's are coming
down, I would look at the OEX in the first place. For example, if there were
a key reversal day (strong up open, weak down close) in the OEX tomorrow, I
might think of implementing a call backspread at a credit. September Calls,
of course.
Just don't hold these spreads for too long, because the time decay may prove
costly. But otherwise they can be great risk/rewards if you really expect a
market to move within a week or so. Risk is also limited.
One other way to play backspreads is to keep rolling and adjusting them
until they become profitable. Requires deep pockets, though.
Hope this helps.
Kind regards,
Michael Suesserott
Disclaimer: The above is for educational purposes only, and neither
constitutes any trading advice, nor an exhortation to buy or sell
securities. Trading securities involves risk of loss.
-----Ursprungliche Nachricht-----
Von: owner-metastock@xxxxxxxxxxxxx
[mailto:owner-metastock@xxxxxxxxxxxxx]Im Auftrag von Carl Kettler -
Oakton
Gesendet: Monday, August 14, 2000 21:42
An: metastock@xxxxxxxxxxxxx
Betreff: Re: AW: What options to sell?
Michael,
Would you please elaborate on where you are finding attractive backspreads?
I am a part time options trader - and will readily admit I am probably
somewhat
like the "Lamb, taking small shavings before the big shear" as someone
previously stated, though I do use wide spreads to limit some of what I
consider
the more risky positions. I like using credit trades because statistically,
most
options expire worthless (excluding the large number which are closed out
before
expiration), and by being selective - I use them as part of my longer term
investment strategy, so I will often allow a position to be put to me in the
case of credit puts, or shorted in the case of credit calls. There is
usually
increased volatility at expiration, so I have seen some whipsawing, but have
the
equity to ride it out till Monday usually.
I trade exclusively equity options, and though I spend a few hours a week
looking for them, I just never seem to find any numbers that work for a back
spread. The premiums usually don't fit. Are you finding these mostly in
index
options? Would you mind sending me an example of one that actually worked
for
you recently?
Thanks in advance.
Michael Suesserott wrote:
> Gitanshu,
>
> thanks for your interesting post, and also for the friendly and
constructive
> approach you are taking. Like yourself, I entered into this thread in a
> spirit of trying to be helpful. There is nothing I stand to gain through
my
> posting here, and I assure you I would immediately fall silent if any
> flaming arose from it.
>
> As you surmised, I am well aware of the points you are raising. Though the
> counterexample you were using does not describe my position quite
> correctly - I would not think it advisable in Guy's case to buy puts with
> only one week to go - still I agree that there are many different spread
> positions that could be used to trade direction to good advantage.
>
> In fact, one additional strategy that I like to use sometimes to trade
> direction is the sale of backspreads (provided volatilities are right, and
> there is a certain volatility skew). So there are indeed many avenues to
> explore in any given situation, as you were rightly stating.
>
> Now let me explain why I don't think these applicable in the case of Guy's
> system.
>
> Anyone who has ever devised a mechanical trading system will have had this
> experience: you change a certain parameter a little - just a little! - and
> test results start diverging by a wide margin. Unfortunately, most of the
> time this happens, results deteriorate.
>
> Now here we have this successful trading system that it took Guy and his
> family 30 years to develop. Don't you agree that Guy would be well advised
> to be extremely careful, even reluctant, to change his system?
>
> There can be no doubt that replacing futures with option spreads,
especially
> those where one gets short premium, thus limiting possible profits,
> constitutes a fundamental change of main characteristics of a trading
> system. To name only one effect that is immediately obvious - the big per
> trade profits (up to 150 points, as Guy stated) just wouldn't have
occurred.
> It is true that losses (up to 62 points), too, might have been less, but
> since the system had 19 winning trades and only 3 losing ones, the use of
> credit spreads would very likely have led to a severe deterioration of the
> system.
>
> Besides, many types of spreads require the use of stops, or at least
> constant supervision and readjustment; readjustment "rules" are not really
> clear-cut because there is a choice of option strikes and volatilities and
> deltas, even different follow-up strategies, with the ensuing action to be
> individually determined by the trader in each and every case. If you can
> call this a "system" at all, it will certainly not be the same system Guy
> had been trading before.
>
> That is why I didn't take spread trading into consideration in my posts.
The
> only option strategy that would preserve the characteristics of Guy's
system
> at least to a reasonable extent, would be the simple purchase of puts or
> calls, as the case may be.
>
> This strategy may indeed prove useful in catastrophic situations such as
the
> October 87 crash where prices moved more than 12 standard deviations, an
> event that statistically should have occurred less than once in the
history
> of the universe.
>
> Kind regards,
>
> Michael Suesserott
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