Earlier I alluded to over diversification being a bad thing, at least stifling gains and possibly even creating it's own series of loss factors. I consider diversity to be a form of insurance, insurance is a cost. Rather than belabour the negative side I am looking at a positive way to diversify ...not in the typical sense.
In the interest of being accurate I figured I would pull a dictionary definition for diversity and found that there are many variations of the use of the word and it's derivatives. These from thefreedictionary.com
The definition that seems to apply to the typical idea of diversity as it applies to the stock market and investing or trading might be:
"the quality of being diverse and not comparable in kind"
This leads to buying different stocks within a sector to provide a moderating effect and in different sectors to provide a hedge or safety with a varied and dissimilar portfolio. Key words that I don't much like here are "moderating", "hedge" and "safety".
The one that I found to more accurately represent my idea was not even a primary definition:
"The relation that holds between two entities when and only when they are not identical; the property of being numerically distinct".
This idea very seldom gets any screen time with the exception of the use of Dollar Cost Averaging (DCA) which is really a form of price diversification... buying a stock at numerically distinct prices to provide diversity within the same security.
The trouble with DCAing is that all trades become one trade as it averages the initial cost of the position. This makes the position still susceptible to volatility losses even if the DCA was lower on each successive trade. The other issue is that exiting the position in a profit provides a gain but buying back into the same position requires close to the same dollar figure unless timing is done well...which DCAing is supposed to eliminate. That makes this a buy and hold strategy only.
Here is a chart of SPY for the last 10 or so months:
The red arrows indicate rough areas to sell spreads and the green lines are rough levels and duration to sell spreads. The indicator on the bottom is an ADX oscillator and has no real bearing on what I am doing here...yet. The black lines are trend lines that would have been established along the way. I would have had linear regression lines serving this purpose day by day.
The call spread strikes are 90, 95, 99, 102, 105, 107, 110,114, 117, 116
The put strikes are 73, 76, 83, 84, 85, 84, 83, 91, 94, 95, 96, 102
First, diversity by trade type. I run call spreads to bracket the upside and put spreads to bracket the down side. In this case no matter which way the SPX goes at least one direction of the trades will profit. Technically this does not make a true iron condor but it amounts tot he same thing, just with a greater yield due to the optimized entries.
Second, diversity by price level. The calls are all distinctly different even if only my a dollar or two. The puts tended to hover in the middle as the price moved sideways a bit. I expect that I could have gone wider as the put premiums likely headed up a bit due to the uncertainty as to the market direction. Some calls could have been put on along this point as well and given my thinking at the time I would have done so... I was bear minded.
Third, diversity by timeframes. All of the trades are of a short duration and due to that they will be staggered, overlapped and just expiring on 3rd Friday's and end of months depending upon when the price sets up. Longer term trades may be taken if the $2.40 target can be met and there is not too much volatility in the market. There is not one single trade for the whole duration or even a scaled in or scaled out trade. Many multiple profit takings.
Jeff.
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