hmm, new idea, a back spread, then using the taf mo to dance around price action.
notice that the curve at the start, has a very mild delta curve, but as it gets closer to expiration, it should be very very steep, converging on the theoretical p&l
so the idea is this, keep dancing from the short side on this, and keep removing risk from the table.
notice that we have put used 90 and 95 strikes at 25% volatility, 30 days, while spot is at 100, implying that, right off the bat, we put the position up for $0, save commissions, and when we do this, theoretically, if we keep our mm at say, max 1 lot, the options is 4lot long and 3lot short, if we implement a 1lot short, we can never ever lose more than the amount we have which is the roughly near $10 max loss, but that is if we are not using the taf mo to dance around this, but if we do, we may end up locking in a loss of less than $10.
all further adjustments will only be done on spot, implying that, it should not be as cap intensive as pure options mo, since each adjustment in options is at least 10pips or 20 pips, while each spot is around 1pip or so, implying that, we can know how much advantage we have before even entering the trade, which is going to be very conducive for trade management. also since we are going to do spot anyway, its moot to compare spot to itself.
also the theoretical implication is this, if you are laying this trade on for 1 month, your risk is say that amount at 1month, not an undefined amount, but how much you make, now is not dependent on how far the market moves, but your skill in managing risk and dancing around the markets. so if lets say the market mean reverts around a $1 range for the entire 30days, and you just keep dancing around it for say $0.50 profit, what do you get? well you get $15 minus a $10 risk for $30 days, implying that you will be $5 profitable net, with a chance to just have price action blow through whatever you have and still earn even more.
the reason why the taf mo is so successful is because it is able to readjust in almost all kinds of conditions, and because of that, it is not gambling in the sense that you sit and hope for things to happen, and for all mo to not be a gambling mo, it has to be able to readjust in all conditions, and now this can take out crisis risk, and perhaps turn that risk into some sort of white swan event, profitable for you.
theoretically, you have decorrelated or perhaps better to be said is, you have limited your portfolio’s risk to extreme standard deviation moves.
remember the post above about the p&l equation?
p&l = svx^i
since v is now a function of limited volatility producing returns, lets call it v’
we have, p&l = s v’ x ^ i
where there is a cap on v to the downside and no cap on v if it is profitable.
when that is the case, there is no such thing as luck anymore, and there should not be any excuse regarding losing the account because of going into death battle mode.
then your success relies only on 1 thing, pure skill.
lets say for example, your have a 100k account, and for 1 month, you are willing to put on $1000 of risk, this is 1% risk per month, but you can dance anyhow, till you are successful, as long as you adhering to the basics of this mo to properly handle the greeks, mainly delta. then what happens? gonna be hard lose the entire account, since its engineered to chop off the wings or even to expose your position to sudden windfall profits.
then next step, you know what you can do?
embed the 3legged animal relationship into this. to tap into the orderflow as it moves.
key important point, notice the blue line, if price just as you put it on, goes into crash mode, you profit by default, look at the blue line at both ends.
also key, is having that blue line, near the current price, when you have the blue line at the current price, what it means is this, right off the bat, you are break even, in this case, so if price move very fast right off the bat but not enough to trigger the end, notice that, you can just take profits immediately. ( to be verified )
ok, so this is the basic theory for managing such a position, next will be field testing.