Credit Spreads for Consistent Profit in Small Accounts: Statistics Course

Week of 6/9

In every new week, I think to myself, this can’t possibly turn out good. The situation always seems, at first, dire. But I do not react to my emotions. I stay mechanical. Or at least attempt to stay mechanical. The result is that the trades work out and I realize there is no need to sweat. I keep mentioning this emotion, because I am still building a faith in this strategy. What my emotion doesn’t fully comprehend is that the probabilities of success are built into the trades. On average my trades have a built in statistical probability of success around 70-80 percent. I am actually around 90 percent successful with the utilization of human edge, meaning my decision making abilities. In a random world I would still be marginally successful. How do I know my probability of success? Recall one of the greeks of options trading is delta. Delta is a statistical function of the probability that an option will expire in the money.  In a perfect world I would be able to stay north of the .16 delta, which possesses about a 16% probability to expire in the money. Pretty straight forward. But why is the .16 delta optimally desirable. On a normal distribution curve 84 and 16 percentiles represent 1 standard deviation. If I trade based on price being at or just outside of the underlying’s one standard deviation of prices, then I take advantage of an inherent statistical probability of success. I am no statistician, but this idea is not especially difficult to grasp.  Who knew that the stats class that I abhorred would one day be useful.

This week was quite fun. The early panic quickly gave way to a rather profitable week, which culminated in a PL with far too much risk and an uneasy feeling about how next week will start. But I have been here before. The trade notes outline well the thoughts on each trade. You will notice some adjustments to trades that may be in trouble. I may discuss the process of adjusting in the next post. Return on risk is down because I took on a lot more risk on the tech draw down on Friday. Those are unsettled trades.

Enjoy the Journals. Don’t forget to comment any questions

6-9a

Trade Journal – Open Trades (5)

Trade Journal – Summary (2)

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