Q: I am one of your Daily Market Advantage students and I was wondering if you personally endorse the ‘Day Trading Robot’? Your answer would be appreciated. Thanks!
A: No I don’t endorse it. I don’t know anything about it but find their marketing not believable.
The reason I’m very, very skeptical is that trading is part science and part art… any attempt to automate trading would naturally be biased by the creator of the ‘robot’.
QUESTION: I have read the special report and if I’m interpreting it correctly we have been in a low volatility environment for the past few months, but appear to be entering a period of increased volatility. So put debit spreads seem to be in order along with vertical call spreads for credit at areas of resistance.
ANSWER: Right! You got that right away… very impressive.
I never said adjusting your credits will give you the same profit potential as the original trade… but it does save the trade and sets up potentially more profit by adding to your inventory.
If I went further than that in the videos I’m afraid I would have lost most of my viewers because there is so much more to successful income trades than just making robotic adjustments at break even points.
If you can grasp what I’m about to tell you I think you could graduate to a higher level of income trading:
Most traders think 2 dimensional, when you need to think 3 dimensional. Credit spreads and condors and calendars, etc are only names we give to help us profit from theta decay but the reality is all you are doing is adding to your ‘inventory’ of short positions and adjusting your deltas and vega according to market conditions and volatility.
It’s a completely different mind-shift when you begin to think in these terms. Suddenly you are like a real business… you add inventory at opportune times and then simply manage it being aware of your risks: delta and vega – the 2 most important risks of the income trader.
QUESTION: I was playing around with SDS and noticed something interesting.
If I buy a call (and not sell a put) I am limiting my loss to the premium paid yet am able to participate in unlimited gain. This way I don’t have to mess with buying the actual stock to set a stop.
I guess I am wondering why establish the downside leg, except to receive a small credit?
ANSWER: It depends on what call and what strike you want to buy.
Here’s why call buying alone is not a good choice IMO:
#1: You buy the call – so your entire investment is at risk.
When the position moves against you and you sell your call then you have no position so you lose on the position and the commissions paid. Or you let the call expire worthless and you lode 100%. Or the stock moves in your favor but since the at-the-money call has a .50 Delta it does not move as much as you expect and your profits are limited.
(SYNTH: when you buy synth stock you place the order to sell the stock at a pre-determined price giving you a snythetic STOP loss so you determine the loss – but it also keeps you in the position! When the position starts to move in your favor again you simply exit your stock position. If the position looks like it will never recover then you can simply exit the entire position at any time without further loss.)
#2: You buy the call with less than a 1.00 Delta which means you lose money every day even if the stock moves in your favor or it just does nothing.
(SYNTH: when you buy a synth stock position the short put in SDS will offset the long call loss due to theta decay.)
QUESTION: with the selling of Puts, do we have to worry about assignments?
ANSWER: If they are out-of-the-money they will never be assigned.
When the option is in-the-money AND is the front month option AND has less then .25 cents of extrinsic value then be cautious. Ex-dividend dates increase your chances of being assigned
QUESTION: If a trade still may be worth placing on Day 3 and your rule states that it should be closed out at the end of that day (or the open of day 4), is there a certain time of the day on Day 3 after which you wouldn’t make the trade because there’s not enough time for the stock to move much before you’ll be ending the trade. In other words, if a breakout finally occurs late in the afternoon on Day 3, isn’t it useless to make the trade at that point?
ANSWER: As long as the stock has not broken out yet it’s never too late.
QUESTION: If you have detected more inside days (that meet all of the criteria) than you have money to invest, how do you rank them and decide which ones to trade? Do you just go with the lower priced stocks because you would have to put out less money in order to have the same profit potential?
ANSWER: I would go with those stocks that have been in the narrowest range for the prior time period (1 week, 1 month etc.) which means that they arealso likely to have lower volatility. At some point they will experience higher volatility and the inside day could be the trigger to a big trade setup.
QUESTION: Do you recommend sticking with only certain exchanges, or is it not necessary to limit yourself in that way?
ANSWER: I use only the NASDAQ and NYSE. Also I only use stocks that trade 1 million shares or more, on average, per day.
QUESTION: If Stock A is trading at $20 per share and Stock B is trading at $60 per share, ignoring the possibility of a major event with either of the stocks (like an earnings report being released), is the likelihood of a $1 move in Stock A equivalent to the likelihood of a $3 move in Stock B (since both would be 5% increases), or would there be no difference in the likelihood of a $1 move between the two. In other words, is the amount that a stock moves dependent on where the stock is currently trading?
ANSWER: The amount the stock moves has more to do with its Beta and volatility than it’s price.
QUESTION: New question: I don’t understand what kind of judgment might be needed at the time of the trade. Isn’t the entry as mechanical, just in the reverse direction, as it was when you would’ve entered the market on the original breakout?
ANSWER: It’s mechanical in it’s execution, you’re right, but in a reversal situation you may want to increase your bet size now that the odds favor you -which requires you to make a new decision.
QUES: In your trading experience with both the iron condors and double calendar spreads have you found it any more advantageous to theta scalp if I have time daily to monitor?
ANS: I don’t theta scalp a double calendar or an iron condor since they already have long calls or puts that protects your position while theta is collected. I will typically only theta scalp by selling a straddle or strangle. Then buy or sell the stock or etf to offset the delta/gamma risk.
QUES: My own experience is that theta scalping (even at 250 or 300 delta
intervals) have not routinely produced _greater profitability_ vs adjusting via spreads near/around the break-even zones.
ANS: I agree. It is not as profitable as adjusting spreads at break-even points.
QUES: I am a very active gamma trader and have been employing my own gamma/theta/volatility algorithm to adjust my gamma positions.
ANS: I have recently been using a formula that has helped determine when to adjust deltas based on volatility and estimated moves of the stock rather than intervals of 250-300 deltas. I have found it to be excellent. Feel free to test it for yourself.
I’d be interested in your algorithm, if you’re willing to share.
The formula I’m using is simply this: E= ([V/16]*St)*R
16 is the sqrt of 256= the average number of trading days in a 1 year period.
V= Volatility (expressed as a percentage), E= Estimated Move of the Stock or ETF on any given day, St=Stock Price, R=Risk Tolerance (the amount of risk you want to assume above an estimated one day move in the stock before hedging deltas. This can be 1,2 or 3 or 4. I don’t recommend a R value above 4)
If I was selling a straddle:
V=.2054
St=50.00
R=2
Then
E= ([.2054/16]*50)*2
E= 1.28
So, on this day, I would make an adjustment only after a move of 1.28 based on a R value of 2 on the stock or etf on that day and recalculate for the next day based on price change and volatility change.
Closing is easy. I close the position when the theta collapses.
1) I understand that you initiate your positions 30-40 days prior to expiration but you also talk in your videos about adding to your positions. Are you referring to adjustments that may become necessary due to a breakeven being threatened? If not, could you explain?
ANS: I only add to positions to increase my profits and if I feel confident that the adjustments will result in a better trade.
2) How do you decide whether you should structure an Iron Condor or Double Calendar for a given ETF?
ANS: If volatility is high and falling I will use an iron condor. If volatility is moving sideways I will use a DC.
3) I’m wondering what your capital allocation guidelines are. Of your total investment capital, what percentage do you allocate for the monthly income system? Of that, what portion do you reserve for initiating positions and what percentage for adjustments?
ANS: I use about 20% of my total available capital on initiating monthly incomes trades. I set aside an additional 10% for adjustments.
4) What has your experience been in terms of being exercised? Has it happened very often? If it does happen I’m a little fuzzy on how to deal with it. Could you clarify?
ANS: You will not get exercised unless your short option has less than
.25 of intrinsic value or it’s close to a dividend payout. It doesn’t happen very often and actually almost never with etf’s. If it happens I simply sell the shares and close my long option position.
5) After reviewing the Theta Scalping video on module 11 I just want to be sure of what you’re doing. If I understand correctly you initiate a position 30-40 days prior to expiration, then adjust if necessary for the next couple of weeks and then in the final 2-3 weeks you will buy/sell deltas using the underlying to remain delta neutral. Is this correct?
ANS: When scalping theta you have to make adjustments when your deltas tell you to. You can’t wait until the last 2 weeks, you have to adjust when it’s necessary. The goal is to adjust as little as possible so that you make more money from the theta you collect than the losses you’ll have from adjusting deltas.
6) During especially volatile periods like late 2008/early 2009 do you still put on monthly income type trades or do you wait for volatility to wane a bit first?
ANS: Please see the Market Report 11-22-08
1. When it is best to put an Iron Condor and when it is best to put a Double Calendar? Is there any circumstance that favors one or other strategy?
ANS: Please see the Market Report 11-22-08
2. On the SPY Iron Condor adjustment, why roll the put spread? If the lower breakeven wasn’t reached, why roll up the put spread? I mean, /when it is worth /to roll the spread that wasn’t touched?
ANS: The side that is being threatened will lose more (as your short option goes in the money) then the side that is making you money so you need to adjust to balance the deltas.
3. Also on the Iron Condor Adjustment, should we roll it every time the market gets near to one of our breakeven points? You said that if the market moves close to one of the breakeven points in a couple of days it is best to take off the position, because the market has changed its mood. Is there any other situation when it is not worth adjusting, either the Iron Condor or the Double Calendar? When?
ANS: I guess it depends on your tolerance and your ability to determine market direction. If you believe there’s no danger in holding your position then keep it. In general, you’re better off making at least one adjustment when the market gets near your short option.
4. I noticed that you put the DIA Iron Condor a few days after the SPY Iron Condor. I think (correct me if I’m wrong) that DIA and the SPY are very correlated, I mean, they move very close to each other. If you had put the DIA and the SPY on the same say, you probably would had to adjust the DIA positions too. So, my question is: That space between the placement of the Iron Condors on the DIA and on the SPY was any kind of “legging” into an Iron Condor on 2 correlated markets ? Understand?
ANS: Yes, I like to stagger them based on time and price. That is a form of diversification.
5. And, by the way what is your opinion on legging into (no out) a position?
ANS: I do not like to leg into a position or out of one. When I put it on I close it as a position and do not leg in and out of them.
6. Speaking of legging, when it is best to put a Double Calendar and when it is best to put a single calendar and then “adjust” it by putting another calendar (hence, creating and “adjusted” Double Calendar)?
ANS: I have no preference and both work OK for me when volatility is relatively low. As mentioned in the report attached I would only do put calendars when volatility is rising.
7. We want to put position 30 to 40 days before expiration. But it there any best hour of the day to put the positions?
ANS: No. I enter my order at the open and at the price I want and hopefully I get filled during the day.
Q: So far so good on my first month of condors…..2 weeks in….still delta neutral. Haven’t had to adjust yet…..but ready to if threatened.
I want to try the back-ratio type of trade to protect against a huge downstroke in January, but for the life of me I cannot get the analysis chart to look like it does in your video.
I have 10 grand in cash in the account with 2 grand in margin already on.
I made sure I am set for “1st triggers sequence”.
I insured I am set to “single symbol” and double check that no other positions or options are checked.
I check the dates……+1 at X, N/A, P/L open……etc…..I’m looking very closely and making certain my screen looks exactly like yours does in the video. I’m making sure I ‘buy’ the distant OTMs and ‘sell’ a single near month ITM. It just isn’t working.
I’m playing around with the strikes and months…..but for the life of me I cannot get the graph to look like yours does in the video. It always shows that the risk amount is roughly half of the margin required……not the 50 bucks or so that you show in the video.
I thought it might be possible that you have to have at least 25 grand in the account and satisfy the day-trading margin requirement and without that it won’t work right…..but I just don’t know.
A little help here? What could I be doing wrong? Thanx in advance if you can help….
A: The victory spreads only work
when the volatility is high.
The best strategy for a market in
which we anticipate higher volatility
is put calendar spreads for monthly
income.
Q: As I build my profit expiration tent i tend to like and use calendars. So thinking nov dec spy I saw that there is very small difference buying a 107 calendar call (sell nov buy dec)versus a 107 calendar put. Am i crazy? or is it ok say to do 107 105 103…etc all using call spreads? or should i use calls on the right side of the tent and puts on the left side?
A: When building calendars it’s important to realize that the maximum profit of a calendar spread is achieved when prices reach the short option at expiration.
So… if you are bullish then you would want to build your calendars with calls at gradually higher strikes 103, 105, 107 widening your tent to the upside potential, etc…
If you are bearish you want to do the opposite- use put calendars at gradually lower strikes…
103, 101, 100 etc…
This way you profit from the anticipated moves and it’s also why I spend a great deal of time discussing the movement of the general market and use technical analysis as much as I do in the daily reviews.
When I first created the course we were in a different type of market where volatility was relatively low (under 25).
Now things are different and the combination of technical analysis with income trades like calendars is the best possible system for profiting from the market.