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Brian Johnson's Book Discussion

Discussion in 'Options' started by Rod M, Feb 21, 2015.

  1. Rod M

    Rod M Well-Known Member

    I purchased Brian Johnson's book and have read thru it a couple of times on my Ipad. I found it to be well written with great, clear charts. However, I also found it to be extremely advanced and academic. I have been using Greek Ratios with good success over the past few years and was interested in "taking it to the next level."

    As a suggestion to Tom and the group, I would like to request some discussions on how to apply Brian's logic to some of this group's favorite trades...such as the M3 fly, weirdor, etc. I would like to see how to use his spreadsheet (which is downloadable as a byproduct of purchasing the book) as an additional management tool for our trades. thanks.
  2. uwe

    uwe Well-Known Member

    The calculation is quite time consuming - maybe we could convince OptionVue to integrate the ratios.
  3. Powers-that-be: please post the recording soon!
    My mistake, the recording is out there.
    Last edited: Feb 21, 2015
  4. tom

    tom Administrator Staff Member

    I made a suggestion to Len Yates about adding the DTRRR, VTRRR and RTRRR calculations into OptionVue but I think the chance he'll do that is low. For one thing, the calculations are proprietary to Brian Johnson, so it would need his approval. The next problem is only a small minority of OV users would know what the ratios were or how to use them. The last problem I see is the ratios are good but don't take into account the volatility skew or how options behave with different DTE and distance from the spot price of the underlying. I'm hoping Brian's next book will address this problem.

    Paul Demers has built a spreadsheet to calculate weighted Vega, which probably should be incorporated into any multi-expiration option position.

    I'm glad to see the discussion of how to improve our risk evaluation methods though! It can only help everyone.
    Chaitanya likes this.
  5. uwe

    uwe Well-Known Member

    I asked James (my sales rep.) a few months ago about Brian's "true theta" and "true vega":
    "Regarding the True Theta and Vega, there is no current plan to add this to OptionVue7 due to other programming priorities. However, this may still be added in future versions."
    This was end of October last year.

    I also asked about a way to export the greeks (to do Brian's calculations with current price and some +/-), but I didn't even get an answer. I was referred to another staff member, who never came back.

    So, how do others calculate these numbers? Just for the current price? I especially liked the way of the book to calculate it for various price points.

    PS: Has anybody done something with the optimisation idea? I really liked the idea, but the math is over my head.
  6. tom

    tom Administrator Staff Member

    I hand jam in the data into an online version of the spreadsheet I built. The only advantage of the online versinon is I lookup the RVX and Risk Free interest rate data. I first use the greeks in the Matrix and if I want to see the risk ratios for other underlying prices, I go to the Analyze chart and set one line to T+1 and look at the greeks at the bottom of the Analyze page for the 2 sigma distance from the spot price.

    It's not automatic but if you keep your DTRRR and VTRRR under -2.0 your T+1 2 sigma values should be ok as well.
  7. Ticks

    Ticks Member

    I purchased this book when it was first available on Amazon and have read and reread it several times. Unlike most who believe the book to be some fantastic insight and possible tool to trading income spreads, I have not found it to be of any value. I agree with the thread originator (Rod) that the book is tedious, "advanced and academic". The spreadsheet has been of no real value and I should have returned the book. I think the concept of being able to objectively and quantifiably evaluate and adjust income strategies is a great idea, however, the book did not provide the necessary info to achieve that goal (at least for me). Before you buy -- read the reviews of the book on Amazon -- particularly the one by Chris Pflum, and Dr. Chrilly Donninger. Save your money.
    Last edited: Feb 27, 2015
    Mark17 likes this.
  8. Gabor Maly

    Gabor Maly Well-Known Member

    I don't know who Chris Pflum or dr Chrilly Donninger is but I do know who Dan Harvey is. I am sure this book will not be for all of us. I did buy it and on my part it was a good decision.
  9. ACS

    ACS Well-Known Member

    The great thing about trading is that it is highly individualized. There is no one size fits all Holy Grail. You might find the book worthless while others find it very helpful. I find Market Profile to be complete hogwash but many others wouldn't trade without it. I am about to start reading it and would welcome constructive criticism as well as praise here.
    Mark17 likes this.
  10. ACS

    ACS Well-Known Member

    I just finished my first reading of the book and found it very educational. What I learned was certainly worth the price I paid for it. The one glaring deficiency to me was the lack of discussion about what to do with a trade after it has been entered. I operate under the assumption that ANY edge we have in options trading comes from how the trade is managed. I firmly believe there is NO strategy that can be blindly entered and held to expiration that will not lose money over time. The other thing I noticed is that the strategy many of us use, the M3, is not well suited for the RRR calculations since it is negative Vega by design. I'd love to see Brian's ideas on this subject.
  11. Andrej

    Andrej Member

    I really like Brian’s work and logic behind calculation but because of nature option skew it’s not always good idea calculate risk on greeks. Subject of weighted Vega, Vega in general and vertical skew was discussed many times during Group meetings by far smarter people than me so I won’t make arguments why positive Vega doesn’t mean you’re hedged for market spike.

    Regarding practical implication of ratios – I did backtest using DTRRR on M3 for last 2 years. I was calculating ratio for every day so one cycle of M3 can take 30-50 minutes of testing. My critical values were -4 if market was going up (delta was negative) and -2.5 when market was going down. Results were slightly better than original “hard” M3 rules. Especially, when you start your trade +50 DTE and use original rules you will get very little gains in first 3-4 weeks if market moving up. Ratios will boost up your theta little bit and keep you in the game. When market moves down -2.5 ratio will force you to adjust your position little bit faster than original rule.

    Using ratios I experienced less DD during period of trade but on downside I had to adjust little bit more. P/L was slightly better using ratios but it depends on broad market and entry timing. I will do another set of tests but for better night sleep I will stick with using DTRRR.

    I was trying to find ratios for others popular strategies on RUT but I didn’t have much success. I think D. Harvey uses for his Twin Peaks ratios DTRR -3(but I’m not 100% sure).
    RayM likes this.
  12. Andrej, thank you for sharing your results.

    Do you use only the DTRRR for M3 management? What is about the VTRRR? I guess it's from the begining out of whack?
  13. tom

    tom Administrator Staff Member

    I think I remember Dan Harvey saying he likes to keep the DTRRR less than -2.
  14. uwe

    uwe Well-Known Member

    I looked it up in my notes. It was the video of Trading Group 2 from 17th of February. DTRRR greater than -2,5 is a warning sign, VTRRR greater than -1 (later in the trade).
    RayM likes this.
  15. tom

    tom Administrator Staff Member

    I pull the RVX data daily on the server and calculate the RVX IV Daily vol (currently at 0.89). I also grab the risk free interest rate from the Federal Reserve bank's web site and calculate the RF daily volatility. Is that something you'd like on the website to plug into Brian's spreadsheet?
    Gabor Maly likes this.
  16. uwe

    uwe Well-Known Member

    I like this idea!
  17. PK

    PK Well-Known Member

    I also purchased the book with Brian Johnson's hedging spreadsheets. For those who are not used to this type of mathematical-theoretical approach (myself included), it is tough to get through it; and it takes some time and dedication.

    What was particularly surprising to me was to learn that closer to the money short term options apparently provide not only cheaper, but in may cases also more efficient and statistically less variable (minimal versus maximal profit), hedging against a 20% price move; even taking into account that you have to renew them more frequently than longer term options. I always thought, following guidelines of other experienced option traders, that one should hedge with further OTM options that are at least 20-30 DTE. The tools of Brian Johnson have shown me that I have spent a lot of money on these far OTM 30-60 DTE options without having obtained efficient hedging.

    Due to lack of knowledge, and in the absence of recurring black swan events, I am not able to check if these conclusions are correct or not. In they were correct, the 15 euros I spent for the book would pay off quickly.
    Chaitanya likes this.
  18. Gabor Maly

    Gabor Maly Well-Known Member

    I have also found his new book very valuable especially on his approach on the VIX calls. One thing we should not forget is that if that black swan event also brings along a market shutdown then it is possible that those short dated options depending on the duration of the shut down will expire. Of course the same thing can happen with our longer dated option if the black swan/market shutdown should happen just a day before its expiration....at the same time one could argue you are more "exposed" in case you roll each week. I had a quick chat with Brian on this concern and while in trading nothing is given we need to assume based on OCC rules and bylaws that the expired option will be honoured and settled once the market reopens at a fair market price.
    Tim R and PK like this.
  19. Paul Demers

    Paul Demers Well-Known Member

    So the bigger question is at what price will they settle at if the contract has expired while the market was closed? There is a danger expecting that they will use the open price when the market resumes trading. My feeling is that they could easily say that the fair market price at the time the contract expired was the market price when the market closed. I have not been able to find a concrete answer to this question and therefore my expectation is that they will use the close price.
  20. Srini

    Srini Active Member

    My guess is opening process will be similar to commodities limit-up/down opening process. Once the exchange is closed, they look at equilibrium orders in the order book, if it exceeds exchange limit price, they will close the exchange and try to open next day. Lumber and OJ was notorious for these type of moves. Lumber markets were closed seven consecutive days in 90's.

    Regarding Brian Johnson's two books, I am very disappointed. It is like blog post stretched to make an article. If one wants to read about hedging "The Second Leg Down" by Hari Krishnan is very good. He provides both theoretical and practical validity for his strategies. He is PhD in Applied math and co-head of unit at Morgan Stanley. Aaron Brown Chief Risk Officer at AQR is written glowing praise, which itself is impressive.

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