One thing I've noticed with all self proclaimed experts and pundits is that they are often wrong and how they come to this admission defines his or her character.
I've been following TastyTrades for a little while now here and there and noticed that most of their problems are glaring issues with earnings. They claim that it is a wonderful opportunity to exercise the law of large numbers by betting on movement within the expected move priced in by the markets. Too many times their fellow Dough traders got DoughJoed by these unexpected moves. (i.e. NFLX, GOOGL, etc). That's got to hurt when the size of the trade is disproportionate and you end up losing all the little profits you nickel and dimmed from the other small trades.
This brings me back to my other post regarding trade small, trade often. This is such a bogus statement that I have to clarify this once again. Do NOT trade often! There is paper trading and simulated trades for a reason and do not fall into the temptation to trade because Bob the trader trades 40-50 times a day. Why does he trade a lot? It is because he has too many broken positions that he needs to fix and the broker wins on every transaction. It's not too hard to be a market maker with a huge spread, sell ToS, and then tell everyone to trade a lot to harness their commissions through Dough.
I used to think SPY was the best product to trade... WRONG! ES/SPX are much better. SPX is 10x the size of SPY, cash settled, expires Thursday of the third week vice Friday, and has larger options volume as compared to SPY. (10x size and often times larger equivalent volume). It is better on taxes since it is a 1256 and not considered an equity. The list goes on but the most important thing is I pay ~$1.2-1.4 per contract on SPX vs paying 10x that trading SPY! (SPY on a good trade is $6-7 and bad trade is $12-14 for 10 contracts). You compare a roundtrip of $2.50 vs $12-24 and do the math for trading "often" on 10 trades... That's $25 for buying and selling SPX ten times vs $120-240... Going on Bob the trader trading 40 times a day that would be $100 on SPX and $480-960 on SPY... That's on one day! Imagine doing this for 5 days in a row with SPY commissions in the upwards of $5k vs $500 for SPX.
Point is, find the right product and trade intelligently. ES is also more expensive to trade than SPX ($50 vs $100) with the same or more expensive contract fee. I feel kind of stupid coming to this realization this late into the game as I've already spent a few thousand dollars on commissions and could have saved a few hundred trading more intelligently.
Then one need to question the trading style for oil futures as well. Should you trade crude oil or USO ETF? Crude lot size is 1000 barrels. Contract price x 1000 = what you pay. So one contract goes a long ways as compared to the equivalent USO etf. Same deal here with respect to liquidity and sizing. CL is one of the most heavily traded commodities in the world. It is traded almost 24/7 while USO trades 9:30-4:00... Hmmm...
Keep sizes small on intelligent products and do not trade a lot! Managing multiple positions is insane and can be a handful. The best thing to do is to intelligently manage a FEW positions rather than throwing out a lot of positions hoping for something to stick.
Lastly, IV_rank is directional. It is highly inversely correlated to the movement of the stock and around earnings. IV_rank is one of many considerations for putting on a trade but it is NOT the end all be all as proclaimed on TastyTrades. A rolling 52 week high/low is no better than any other technical analysis indicator because just as Alex Weinsenbach says "Past trends cannot predict future events." Yet IV Rank is based purely on past performance and volatility movements...
Last night I made a good trading friend with another blogger (Henrik the Lazy Trader - http://www.the-lazy-trader.com/). We've had some good discussions of all of the above. Conclusion? All these gurus are morons and no better than you and I at anything they do. They typically have more capital to play around with or have alert/subscription services to feed them so they can become great "educators" vice trading. Almost all of them do not have verified trades or audited verified trades. This website is great are debunking a lot of these self-proclaimed prophets who make little or no profit (http://www.tradingschools.org/).
Happy trading!
All valid points, but I think that the Tastytrade trading theory is based on high IV and (equally important) number of occurrences. The "number of occurrences" part, I feel they don't stress enough to their viewers.
ReplyDeleteI compare it to card counting at the Blackjack table; if you don't have enough $$$ to play enough hands, then the math doesn't work out for you. If you do have enough $$$ to make all the "absolutely necessary" number of trades, this can work out. However, I agree that there are better ways to make the same amount of return for a lot less activity.
This was debunked. Check: https://twitter.com/Minty415/status/628934530276065282/photo/1
DeleteI have the episode as well that they "forgot" to archive. The straddle without selling the OTM call was MORE profitable and won MORE times than the straddle with the call sold.
Conclusion? Tom: "I don't like this takeaway."
IV_Rank is not the end all be all. It's just another Technical indicator created by the TastyTrades gang to promote frequent trading.
So you're saying that having the importance of having the correct number of occurrences was "debunked" or are you commenting on something other than what I was trying to point out? Not sure I understand how this comment relates to mine.
DeleteThere is nothing wrong with occurrences. You simply cannot win on a small account with the commissions charged the way they are and expect to go the long haul.
DeleteThe longer you test theories with real money the more losers you may incur as well. Real losers not just paper losses. For all the small trades that is done and marginal profits made the big swings will blow out all the small profits in a flash.
% of winners, high IV, and trading a lot doesn't seem to hold any water. Either you tick or tack, zig or zag, and trying to guess direction is no better than 50/50. Black Scholes doesn't mitigate risk nor can you price in large swings into some theoretical model.
Well articulated. Thanks for sharing this.
ReplyDelete