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The art of adjustments

Discussion in 'Options' started by MattW, Oct 9, 2015.

  1. MattW

    MattW Moderator Staff Member

    Currently backtesting the M3 with one small live trade on (I pay much more attention when I have some skin in the game), and trying to understand something. Maybe someone can provide some insight. So I understand that the M3 is a hedged trade. The upside is hedged by the call, and the downside is partially hedged by the fly. And as I understand it, the idea is to collect theta while adjusting the hedges to maintain safety throughout.

    The problem I keep running into is that many of my adjustments lock in losses, and I wind up adjusting myself down to my max loss a lot of the time (in the backtesting). How do you guys get around this? Is the idea to only "add" an adjustment only if I can't remove an adjustment for a profit while maintaining my favorable greeks?

    Sorry for the beginner-ness of this question. I totally understand the greeks, the greek trends, partially understand skew and "skewness" and it's effects, but adjusting is still tricky to me.
  2. ACS

    ACS Well-Known Member

    Do you have the M3 course? Have you been following John's Monday morning webinars? Adjustments will be losers quite often but should not be producing frequent max losses.
  3. MattW

    MattW Moderator Staff Member

    I do have the course, yes. I haven't been following the webinars (new to the M3). I'll have a look.
  4. vega4mike

    vega4mike Well-Known Member

    Go to John's youtube channel, loads of examples in his videos stretching as far back as 2012, so take a weekend off (or a few) and prepare for a M3 box set of examples complete with performance records (simulated of course).:)
  5. PatrickS

    PatrickS Member

    Small note: When you're doing your backtests and you are looking at the P/L. Are you sure it's the total profit including unrealized that you're looking at? Select this in the info area of the account. Else, you may just be seeing realized P/L and thinking you're going max loss when you're not.
  6. Jay Hattler

    Jay Hattler Well-Known Member

    @PatrickS: This is a very good point. I have found peculiarities in using the Recon field in the Transaction Log that seem to influence what shows on the G&L. If I use too many groupings in the Recon field, the "G/L to included previously realized G/L's" does not work properly. Fortunately, this has only happened (so far) in paper trading, but I have gone through entire trades, not realizing that the G&L showing on the Matrix screen was way off.
  7. MattW

    MattW Moderator Staff Member

    Ah, yes, thank you! I was wondering why my analyze screen wasn't showing the "previously realized P/L" figure I was seeing in the examples. I watched some videos where John's trade would show a gain of $9k or so on the matrix and a previously realized gain of NEGATIVE 5k on the analyze screen. So if I'm understanding correctly, that example would indicate that the position was actually up 14k, but the calculation on the matrix screen is taking into account the previously realized gain (loss in this case). Correct? Was thinking he was violating his own rules, but figured I was missing something. Taking a 5k gain that cost 9k in adjustments is a terrible plan!
  8. PatrickS

    PatrickS Member

    Yeah, it's not obvious. I hadn't realized to select that at first either. I was just looking at the reports (combined) to see my overall P/L. That number now is always appearing appropriately once I selected the "G/L to included previously realized G/L's.

    If it was showing -4k realized and a gain of 9k overall. I'd think it is 14k unrealized and -5k realized=9k combined. But I'd have to look at his screen.

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