gg12, Yes you are correct. It is a systematic approach. Most of the factors you have listed are explained and controled by the model already. I adjusted it to be a Buy-Only strategy because I believe the market has a long-term uptrend bias. My holding periods are too short for valitility change to have an significant impact on the estimated closing option price. I picked the strike price that has semi high deltas to control the risk/reward ratio but I guess anybody who has a deeper pocket would go for much lower delta because the $ returned from historical test using lower delta was... let's just say "significantly higher". However, the accuracy on the predicted closing price for the low deltas were not as accurate. Finally - commissions can be further reduced - couldn't agree more Thanks and good luck in your trading as well.
<i>"I adjusted it to be a Buy-Only strategy because I believe the market has a long-term uptrend bias... ...My holding periods are too short for volatility change to have an significant impact on the estimated closing option price."</i> The market may have a long-term uptrend bias, but your holding periods for trades aren't measured in years. Your test phase came during a persistent bull market run. You will trade long enough to see more than one bear market period, be it weeks or months at a time in duration. Please get comfortable with trading put options to the downside when your modeling merits, and you'll do great :>) <b>Veteran Index-Option Trader</b> from 1999 ~ 2003
Austinp, Thanks for the feedback. I guess I was a little misleading when saying "buy-only, uptrend bias"... What I meant to say is that, since generally speaking the 'overall trend' (not in any particular period) the market has the expectation of moving higher into the future, AND if I am so blindly making a 50/50 bet to make a trade at any given day, I'd pick buy over sell the S&P, that's all. I do agree that I should fine-tune the model to incorporate trading puts to take advantage of downside movement in the future. I don't know how many more weekends will have to be devoted into modeling this but doesn't trading require the mind and devotion of an entrepreneur? Lastly, I know that I have not been in the market cycle long enough to say I have seen everything yet. But the backtest period includes the period between 2000-03 to 2002-10 where you see in the 2 & half years SPY moved from 153.56 until it hit the bottomed at 78.10. It doesn't seem like much of a bull market in such period. But if you meant the paper-trade period after the back-test, then yes you are absolutely right that it was a bull run 05-06. I am crossing my fingers hoping the model will make it through any major bear market such as the one seen in 2000-03 to 2002-10 period. I guess before that put-strategy is in place, I will have to go work-out a little more for a stronger stomach. LOL Thank you again for the input.
JLB123 I think that if you have 'enough' time then go for lower deltas and "significantly higher" strike prices. If your backtesting justifies that - do it! Everything else is clever money management. I also think Austin is right - make a complete backtesting on puts as well to diversify your approach. Do not hesitate to make the hard work and to go the extra mile! Good luck! gg12
(Yikes am I gonna be the only one going long here?... ) Initiated long position with DIA March 120 call @3.60. Open Positions : 2
JLB123 The more systematic you are the more success you will have. The best SPY, SPX options are Calls which are some strikes out of the money. If you report your trades you will probably get some comments (at least from me). The long trend is up. Calls are cheap (take some strikes higher than usual). Apply good money management. Hold long enough for big gains. Good luck in your trading!
Thanks gg12. Yeah I'm sticking to my rules and the systematic way of trading really takes away the mix feeling and second guessing. I have followed the model and closed the lower strike call today with a small loss (argghh if I bought at the market open today instead of market close yesterday it would've been a different story). Anyway the other call has passed the threshold so I can hold it longer now. Open position : 1
JLB123 Please think about following ideas - set agressive learning goals (spend more time learning than trading) - set only moderate trading goals (various timeframes) - evtl. don't trade DIA (if you make losses) and focus on SPY (DIA and SPY are very much correlated) PS: There is a special environment now, because of the increased volatility (see attached graphics). Vola has a big influence on Options. You are trading direction and vola.
Thanks gg12 for your suggestion. I always try to learn new stuff and incorporate it into my model. If it increases the overall balance between total % return and accuracy for the back testing period then I would implement the new rules. Over the years I have tested with different time frame, different settings of indicators, different strike prices... There are times that the model would identify DIA as a better opportunity (risk/reward ratio) compare to SPY. The one thing that's lack in the model is the use of put to take advantage of downside movement... oh well that's my next project.
2007-03-05 Trading Activity : Initiated long position with SPY March 135 call @3.70. Open position : 2