Category: The Greeks

Question about Monthly Income Trading

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.

Questions about the Greeks

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.

Training Videos Question 1

Q: I bought your training videos 3 weeks ago , which appear to be your first version of the training course “trading as a business”, in a hope to learn option trading cashflow secrets regardless of the market move, the videos are great and I am really happy with them, but they were recorded few years ago I believe, but that is ok as according to you , this is an evergreen business as the principles will never change because the markets never change.

the thing is , after I signed to your daily market advantage a week ago , I noticed that some of your comments were based on some techniques that were somehow different than the videos I am learning of , and I am referring at the video of 31/08/09 where you mentioned something about the put spread calendar that is good to trade now and that the iron condor is not suitable at the moment.

– my question is, as a new trader what would be the best strategy that you recommend from your videos to trade the current market for monthly cash flow, something does not need too much of the advanced technical analizes or too omplicated and easy to handle until i pick up the knowledge from your daily market advantage.

A: I appreciate you feedback and your questions.

It’s true that the principles I taught are evergreen in the videos from last year. The ‘greeks’ will never change – but *how* you use them is a different story.

I have slightly revised my strategy to take better advantage of market moves using income trades with technical analysis on volatility as the most important component.

I released 2 important white papers: One paper on the greeks and another paper last November 2008 to take advantage of the volatility. (These are included in the download area for all paid customers)

Theta Scalping Question 1

Q: Towards the back of the video, you indicated an adjustment of adding 300 shares of QQQQ stock. You had 60 contracts open. If I wanted to know how many shares would be required for one contract, would I divide the 300 by 60, or 30, or 15? I would assume divide by 15, since for the iron condor you used needed a long and short for the puts and the calls, or 4 contracts for one condor.

A: Adjusting for theta scalping positions has nothing to do with the number of contracts in your position, it has to do with deltas.

In the video you reference I was probably ‘short’ 300 deltas that’s why I needed to buy 300 shares.

In order to determine the number of shares when theta scalping you need to know your deltas.

The delta will tell you what you need to get back to a delta neutral position

For example if you’re short 300 (displayed on TOS as “-300”) 300 deltas then you would need to purchase 300 shares to be ‘neutral’ and if you were long 300 (displayed on TOS as “+300”) then you would need to sell 300 shares (short) to be delta neutral.

However, and this is important, it is not alway wise or preferable to be perfectly delta neutral. You need to know the bias of the market at any one time. For example the market bias since March 9 has been ‘up’…
you would have done well by understanding the current market bias and trading accordingly by being slightly long (positive) deltas at all times.

The market bias can be either:

1) Long (up trending)
2) Short (down trending) or
3) Neutral (trading range bound)

The bias changes week to week, month to month so it’s important to know the current market bias that’s why the daily market videos I do are so important to all option traders. You need to know the bias.

Hope that helps