Posted by falcon5678 on 18th of May 2011 at 01:12 pm
Tumbler, what assumptions are you making for the
implied volatility levels you are paying. Over the years
we've seen VIX levels anywhere from 15 to 70, with the S&P
implied ranges accordingly wide. In particular,
near month vols can move around very rapidly so it's pretty
tough to assume a given vol level for your at-the-moneys.
Perhaps if you followed a chart of implied vols for the S&P
over the time period used you would get a more accurate estimate of
profit/loss (not to mention say an average slippage of a nickel to
trade in and out of the options). You can find something like
this at
www.ivolatility.com.
It would be a lot more work but would be much more accurate
in the end. It sounds nitpicky but vol levels are paramount
to option trading and will make a big difference to returns.
falcon - not sure I understand your question. I didn't make
assumptions for vols. Just back tested based on the entry/exit
signals. Since the entry/exit times are fixed the only variable
with regard to volatility would be skew. Granted skews will vary
based on market conditions, but given the trade's time horizon and
investment constraints not sure it would change your selection
criteria (near month vs. farther out).
Posted by falcon5678 on 18th of May 2011 at 04:06 pm
Tumbler, how did you derive your profit or loss number for a
given option? For example what were the prices you
chose at those entry/exit points and how did you arrive at those
prices? Look at the chart below. The yellow
line represents SPY implied volatility (the actual price you pay)
over the past year. In June of 2010 an at the money with 50
days to go might have cost you $3. In Feb of this year the
same call might have cost you $1.75, all else being equal. In
Jan of 2009 it might have cost $5. While holding the option,
the implied levels would have dropped at certain times in the
year (most of the time in fact) and cost you (Vega risk-the risk in
general volatility levels dropping). Also, are you including
time erosion in the mix? I read your assumptions list but I
don't see these issues addressed, and they are incredibly important
to the final profit/loss. In fact, I would generally
disuade folks from using options with this system unless they
are very well versed in option greeks and the associated
risks.
The skew will matter to some extent as an option goes from at
the money to in the money - in fact it will likely cost you in
extra slippage since market makers will want to buy deep calls at a
discount to intrinsic value. This would be an added cost to
playing options in the system.
Falcon, profit and loss for a given option was the difference
between the price paid for the option at the close of the session
(per entry rules) and the price of the option sold at the open of
the session (or close of the session for a put - again per exit
rules). I bought ATM strikes which I believe are the best fit for
this system. Discretion then comes with time value - how far out in
time do you want to buy?
The assumption for options purchased was a minimum of 50 days to
expiration and a max of approx 80 days. I did not buy near month
options to reduce affects of theta decay. The tradeoff is vega, and
in periods of high volatility there is vega risk to the position.
If you look at a volatility chart for SPY, the period of high vols
was relatively brief. Therefore, I would prefer to account for
theta decay. One could argue both are moot points based on an
average trade length of 12 days.
Bottom line in my opinion is how high is high? Based on this
crude analysis the results show positive expectancy - like the SPY
system. To your point there are many ways to optimize the use of
options with the system.
Posted by falcon5678 on 19th of May 2011 at 11:29 am
Tumbler, how did you generate the option prices. Did
you get actual end of day and opening bid/ask prices for all of
them? The would have been a lot of work!
Falcon, yes I got actual prices for each day/trade (closing and
opening prices). Yes, alot of work but worth it.
By the way, I updated the google doc. It has multi-entry data
for stock and options trades. The stock trades are a lift from
Matt's data. The last trade is included.
Posted by falcon5678 on 19th of May 2011 at 12:36 pm
Well my apologies then! I assumed you generated prices
based on a ramdom pricing model but if you based the trades on
actual bid/ask prices that is fantastic work! The vol
levels don't matter then for your results. I
suppose they matter in a general sense since anyone trading
options should be aware of those risks but as far as your results
are concerned - great work! Thanks for doing this. You
are right that the risks are mitigated by the average trade
length. Bottom line is - when a system is correct on 9 out of
10 directional trades you're going to make money trading options,
no matter how much the vols are moving.
Falcon, if you see the worksheet it is a clean entry exit set up
with each trade averaging around $4400....so to make the profit
numbers using less than 5% of the capital of the SPY normal $100k
system, well now THAT is good leveraging !!!
My question earlier, about the max profit or "draw UP " % value
I think would benefit from some type of volatility study but even
there it is not necessary.
Tumbler, what assumptions are you
Feedback
Posted by falcon5678 on 18th of May 2011 at 01:12 pm
Tumbler, what assumptions are you making for the implied volatility levels you are paying. Over the years we've seen VIX levels anywhere from 15 to 70, with the S&P implied ranges accordingly wide. In particular, near month vols can move around very rapidly so it's pretty tough to assume a given vol level for your at-the-moneys. Perhaps if you followed a chart of implied vols for the S&P over the time period used you would get a more accurate estimate of profit/loss (not to mention say an average slippage of a nickel to trade in and out of the options). You can find something like this at www.ivolatility.com. It would be a lot more work but would be much more accurate in the end. It sounds nitpicky but vol levels are paramount to option trading and will make a big difference to returns.
falcon - not sure I
Posted by tumbler on 18th of May 2011 at 01:39 pm
falcon - not sure I understand your question. I didn't make assumptions for vols. Just back tested based on the entry/exit signals. Since the entry/exit times are fixed the only variable with regard to volatility would be skew. Granted skews will vary based on market conditions, but given the trade's time horizon and investment constraints not sure it would change your selection criteria (near month vs. farther out).
Tumbler, how did you derive
Posted by falcon5678 on 18th of May 2011 at 04:06 pm
Tumbler, how did you derive your profit or loss number for a given option? For example what were the prices you chose at those entry/exit points and how did you arrive at those prices? Look at the chart below. The yellow line represents SPY implied volatility (the actual price you pay) over the past year. In June of 2010 an at the money with 50 days to go might have cost you $3. In Feb of this year the same call might have cost you $1.75, all else being equal. In Jan of 2009 it might have cost $5. While holding the option, the implied levels would have dropped at certain times in the year (most of the time in fact) and cost you (Vega risk-the risk in general volatility levels dropping). Also, are you including time erosion in the mix? I read your assumptions list but I don't see these issues addressed, and they are incredibly important to the final profit/loss. In fact, I would generally disuade folks from using options with this system unless they are very well versed in option greeks and the associated risks.
The skew will matter to some extent as an option goes from at the money to in the money - in fact it will likely cost you in extra slippage since market makers will want to buy deep calls at a discount to intrinsic value. This would be an added cost to playing options in the system.
Falcon, profit and loss for
Posted by tumbler on 18th of May 2011 at 05:28 pm
Falcon, profit and loss for a given option was the difference between the price paid for the option at the close of the session (per entry rules) and the price of the option sold at the open of the session (or close of the session for a put - again per exit rules). I bought ATM strikes which I believe are the best fit for this system. Discretion then comes with time value - how far out in time do you want to buy?
The assumption for options purchased was a minimum of 50 days to expiration and a max of approx 80 days. I did not buy near month options to reduce affects of theta decay. The tradeoff is vega, and in periods of high volatility there is vega risk to the position. If you look at a volatility chart for SPY, the period of high vols was relatively brief. Therefore, I would prefer to account for theta decay. One could argue both are moot points based on an average trade length of 12 days.
Bottom line in my opinion is how high is high? Based on this crude analysis the results show positive expectancy - like the SPY system. To your point there are many ways to optimize the use of options with the system.
Tumbler, how did you generate
Posted by falcon5678 on 19th of May 2011 at 11:29 am
Tumbler, how did you generate the option prices. Did you get actual end of day and opening bid/ask prices for all of them? The would have been a lot of work!
Falcon, yes I got actual
Posted by tumbler on 19th of May 2011 at 11:58 am
Falcon, yes I got actual prices for each day/trade (closing and opening prices). Yes, alot of work but worth it.
By the way, I updated the google doc. It has multi-entry data for stock and options trades. The stock trades are a lift from Matt's data. The last trade is included.
https://spreadsheets.google.com/ccc?key=0Aozz_o09dO3mdEpVcC1lNzY4cEU1MnEwWkVNYzBzcFE&hl=en&authkey=CN3ZlJEJ#gid=0
tumbler , does your historical data
Posted by perthx on 19th of May 2011 at 12:47 pm
does your historical data give you the high and low for an option each day too?
perthx, unfortunately it doesn't. I
Posted by tumbler on 19th of May 2011 at 01:54 pm
perthx, unfortunately it doesn't. I know that would make your project much easier.
thx tumbler
Posted by perthx on 19th of May 2011 at 02:16 pm
yeah i my just have to go ahead and pay the $250 for a single month for such data.
Tom-think or swim appears to offer closing data only.
I think it has Open,
Posted by tom on 19th of May 2011 at 03:18 pm
I think it has Open, High, Low, Close
Well my apologies then! I
Posted by falcon5678 on 19th of May 2011 at 12:36 pm
Well my apologies then! I assumed you generated prices based on a ramdom pricing model but if you based the trades on actual bid/ask prices that is fantastic work! The vol levels don't matter then for your results. I suppose they matter in a general sense since anyone trading options should be aware of those risks but as far as your results are concerned - great work! Thanks for doing this. You are right that the risks are mitigated by the average trade length. Bottom line is - when a system is correct on 9 out of 10 directional trades you're going to make money trading options, no matter how much the vols are moving.
volatility? we dont need no stinking.....
Posted by perthx on 18th of May 2011 at 03:07 pm
Falcon, if you see the worksheet it is a clean entry exit set up with each trade averaging around $4400....so to make the profit numbers using less than 5% of the capital of the SPY normal $100k system, well now THAT is good leveraging !!!
My question earlier, about the max profit or "draw UP " % value I think would benefit from some type of volatility study but even there it is not necessary.
tumbler -- again, thanks so
Posted by Michael on 18th of May 2011 at 03:00 pm
tumbler -- again, thanks so much for this work.