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2021.11.10 – SESSION 29 – GO ASK A TRADER

10 replies, 6 voices Last updated by Sherri Locke 3 weeks, 1 day ago
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    • #18185

      Sherri Locke
      Keymaster
      @KDAKSj4ux
      Going to The Trading Triangle LIVE 2016Ultimate Income Trader Workshop

      The recording of the GO Ask A Trader session from earlier today is ready to view. Enjoy!

    • #18183

      David Wagner
      Participant
      @hazelnutfoundry@gmail.com
      Points: 307
      Rank: Freshman

      Hi John,

      Since mid-late October, I’ve been having challenges with SPX BWB’s not working as expected, T+0 is crushing at the upper wing, price collapsing under the tent, etc. I realize this is due to the unusual volatility environment we’ve been in.  What I’d love to better understand is how you trade in these environments.  As you say, we should move toward aligning our trades to the market and not expect a single trade to work in every environment… so what works in this type of environment?  How might one structure both opening positions and/or upside adjustments when vol shifts adversely like it has?

      Thanks!

      David W.

    • #18172

      Erwin Storms
      Participant
      @storminator@telenet.be
      Points: 142
      Rank: Newbie

      hi John, (cfr. my email – but in here as it might also benefit others): with price near resistance on the channel we’ve been in for quite some time, I was thinking of entering a BB. My thinking, IF we breach the channel to the upside, I’d scale into the position (1 or 2 times and then roll, if needed). Alternatively, I’m in with 1/3 and then follow the guidelines. In your email, you mentioned having a technical stop in case a breakout would occur. Wouldn’t those guidelines accommodate for dealing with (large) price movements? I understand there’s an ELT at some point, but prior to that: we’d scale in and roll the position. Maybe I’m missing something, but from the program I understood that BB is a good setup when expecting horizontal or bearish price action. (… in this case, RUT went from 2300 –> 2450 during last week, so maybe that’s just way too much for the guidelines to deal with (?)).

      Basically, my question boils down to: “are the guidelines not adequately dealing with (large) price movements?”. Thank you for providing your insights.

    • #18146

      Dave Nadeau
      Participant
      @dave.nadeau@live.com
      Points: 269
      Rank: Freshman

      Hi John,

      As a proposed topic for discussion, I’ve been wondering about adding Calendars to Butterflies.

      Certainly, I can see these as individual trades, and as a combined trade, the effect is most noteworthy on Vega.  From other OTFI comments and several videos of yours, I’m in agreement that the Greeks are guidelines or estimates only (a summation of each of the legs).  I’ve observed IV dropping during a Butterfly or M3 trade but because the IV Skew moves adversely, the T+0 line sinks instead of rising as the negative Vega would suggest.  That has led me to wonder:  is there a benefit to adding Calendars into a Butterfly or M3, V22 which increases or zeroes out Vega?  Or is there another benefit not indicated by the Vega of the combination?  Or should those trades be left separate for tracking and adjusting?

      Thanks for any thoughts, John!  I know this is a large subject area.

      • #18158

        John Locke
        Keymaster
        @john-locke
        Going to The Trading Triangle LIVE 2016Locke In Your Success CoachAPM2Trade JournalsUltimate Income Trader Workshop

        Thanks for the question Dave. Great topic for the meeting!

    • #18117

      Dan Shaw
      Participant
      @dkshaw@gmail.com
      Points: 1 135
      Rank: Sophomore

      Hi John,

      In this current environment where butterflies are unusually inexpensive, it seems more common that only a portion of that planned capital is used at any given moment. Granted, you can get close sometimes as your trade comes into expiration, so you do have to watch it.

      Question: Is there a way (and does it make sense) to leverage this low-cost environment and use capital-efficient techniques to trade with more butterflies at any given moment and leverage more of the planned capital that is sitting in one’s account? I’ve heard about the capital-efficient M3, but have not seen it in action.

      Example: Placing a 20 lot ($50k PC) M3.4U trade with 56DTE has a current margin of $31k. If I were to bring up the LL’s 10 points, my profit peak goes from $88k to $83k and my current margin drops to $16k. At this price, I could technically double my lot size and still be well under the $50k PC. As my adjustments and time go by, I might have to narrow the butterfly, or I could always reduce my size temporarily.

      Downsides that I can think of would be: 1) Narrower tent. 2) Lower potential for profit (slightly?), and 3) The need to be much more aware of your current spend.

      It just seems like good cash is being left on the table. I look forward to you explaining how crazy this idea is. 🙂

      -Dan

      • #18127

        John Locke
        Keymaster
        @john-locke
        Going to The Trading Triangle LIVE 2016Locke In Your Success CoachAPM2Trade JournalsUltimate Income Trader Workshop

        Hi Dan,

        Let me give you a quick answer.

        You always need to trade size to your loss number or exit loss trigger. That actual capital in the trade is irrelevant (within reason).

        The current environment allows for many more contracts and/or wider wings  for our planned capital numbers however due to normal IV shifts, the bigger positions will get drawn down much faster resulting in hitting you exit loss trigger much faster, therefore in order for things to go well the increased position size will require a larger ELT.

        In a sense, you could also lower planned capital on the current trades and claim you made a higher return on capital, but in the same context you’d also have to increase the ELT as a percentage of planned capital for the same dollar loss.  But my point is that you trade size to the allow dollar loss. The rest is just semantics as to how you frame the situation.

      • #18141

        Dan Shaw
        Participant
        @dkshaw@gmail.com
        Points: 1 135
        Rank: Sophomore

        Thanks John! As soon as you gave your answer, it made total sense. You have always said that successful traders do a good job at managing their risk. I didn’t consciously put planned capital together with risk management in this scenario. An “Aha!” moment on my part.

    • #18086

      Erwin Storms
      Participant
      @storminator@telenet.be
      Points: 142
      Rank: Newbie

      hi John, ref. the bearish butterfly bonus video on “2020 update”, you mention the following:

      1. “Newer environment: severe shifts in implied volatility structure of the Russel. Presents different types of T+0 lines and requires adaptations to adjustments”. I’m new in options trading and would appreciate if you could clarify how it was before 2020 and what it became after 2020 such that I can understand the comment you made in the video.
      2. then there’s a few software settings: “Vol surface unchecked” and “CEV set unchecked”. I have no clue what this means and why it’s important. Can you clarify this? …or is it not all that important to understand to run the strategy succesfully?
      3. “Iron butterflies ONLY when using ONE software”: is this statement still valid? Or should we do PUTs instead again?
      4. Guidelines as to when to use this strategy are still valid, I assume? …in market conditions where we expect price of underlying to have reached a point where we don’t expect a massive up move.

      Thank you

      • #18126

        John Locke
        Keymaster
        @john-locke
        Going to The Trading Triangle LIVE 2016Locke In Your Success CoachAPM2Trade JournalsUltimate Income Trader Workshop

        Hi Erwin,

        Let me take these one at a time

        1. “Newer environment: severe shifts in implied volatility structure of the Russel. Presents different types of T+0 lines and requires adaptations to adjustments”. I’m new in options trading and would appreciate if you could clarify how it was before 2020 and what it became after 2020 such that I can understand the comment you made in the video.

        Implied Volatility (IV) is a huge, complex topic but in short, the IV of an option is based on the extrinsic value in the option, which is created by supply and demand.

        The demand on options has increased dramatically since covid and that has changed the IV structure of the indexes, more specifically, it has changed the vertical skew curve (IV difference between options in the same expiration cycle).

        The difference in extrinsic value in the options involved in your position will dictate the cost, T+0 line profile, and Greeks in your position.

        Since the IV (extrinsic value) in options is so different than before, butterflies (for example) of the same expiration date are much less expensive, much flatter Delta, and have a substantially flatter T+0 line than pre COVID.

        Naturally, the positions react differently than Pre COVID as well.

        I would suggest going into back tester and experiencing these differences on your own.

        If you want a complete explanation of IV, I would recommend our Ultimate Income Trader program.

         

        1. Then there’s a few software settings: “Vol surface unchecked” and “CEV set unchecked”. I have no clue what this means and why it’s important. Can you clarify this? …or is it not all that important to understand to run the strategy successfully?

         

        The Vol surface and CEV settings in ONE will change the way the software interprets Implied Volatility. The different settings will change the Greeks and T+0 profiles of your position. This being the case you will often get different Greeks and therefore different positioning, and sometimes different results (trade for trade) when following the same ruleset. My suggestion is that you leave those both unchecked.

         

        1. “Iron butterflies ONLY when using ONE software”: is this statement still valid? Or should we do PUTs instead again?

         

        Yes, this statement is still valid.

        ONE interprets IV differently than OV with call and put options in a way where you’ll get very different Greeks and T+0 lines in the synthetically same position. The Greeks in ONE “most match” the OptionVue system when using iron.  It is a deficiency in the software in my opinion but since we developed BB on OV, I would use iron in ONE. That said you are free to live trade put butterflies but I would monitor the BB positions as iron butterflies in ONE.

         

        1. Guidelines as to when to use this strategy are still valid, I assume? …in market conditions where we expect price of underlying to have reached a point where we don’t expect a massive up move.

         

        Yes the 2020 update is still valid although be aware that there will be no further updates to any of the SMB programs due to our separation. For the time being, if any changes are deemed necessary, they will be announced, and made in Options Trading for Income webinars

         

    • #18048

      Sherri Locke
      Keymaster
      @KDAKSj4ux
      Going to The Trading Triangle LIVE 2016Ultimate Income Trader Workshop

      We highly encourage PRO, GO, and Trading Performance members to post their questions and topics to be discussed in the REPLY TO text box below at least 48 hours in advance of this meeting.

      Click here if you would like to request a mini coaching session.

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