Ok .... Been here for a little bit. I'm going to be blunt. Because I am blunt. A lot of folks, need to stop listening to people, who have become bitter over their own losses, or failed processes, or disappointments. I'm so sick of hearing "Never go near options" and "Options don't work" and "Options are a suckers bet" ... as well as statements like this I just ran across: "I'm a coder and data scientist. I have been working on trading for over 2 years. Spent lots of money. Every trainer i have paid lies. Because, there's no profitable system. If there's, nobody will teach you what it's." Bullcrap. I DO NOT MEAN to personally slam the people who made those statements. It's nothing personal. But for their own good, and others own good, you need to be demonstrated that you are just wrong. First of all, Options are about the most wonderful gift ever devised for new traders, and especially new traders who don't have a lot of capital. I'm sick of hearing how trading is a zero-sum game. It's not. The great Charlie D said it back in the day, and it's true. Trading is not zero-sum. Dividends are paid out on stock, that are paid as income, that leaves the system. New information is input to a system, which, Game Theory allows for multiple winners. Multiple winners <> zero sum. For those who haven't run across me earlier, I'm the Junior Partner at a small Closed Equities Firm (we do not accept, legally, any outside investment. Only Partners). My Senior Partner, devised a non-correlated process that he is willing to share. It will be done in real-time. A grid will be created that show you the results, as a real trading firm would create those results, such as you find by other trading firms at third party sites like " https://app.coquesttradersresearch.com/ " It's a SIMPLE quantitative process. It's not one we use. It's meant to illustrate a process in real-time Because basically? New and aspiring traders need to stop listening to people who have no REAL skin in the game ... Call it a project, borne of frustration of watching new people be screwed ... What will follow? Is a white-paper he created ... for the process ...
Ok, this is his whitepaper. He's given me permission to use it. He slightly edited it, but it all stands, and can be examined on it's own merits ... So here it goes ... Simple Longer-Term Non-Correlative Strategy Processes “The Process” that is Two Processes Avoiding a Mypoic Approach to Trading Introduction There is a singular problem, encountered by new and aspiring traders. Which is the commonly held myopic belief that one secretly guarded 'setup' or 'system' exists of 'entering' and 'exiting' a market. New traders seem to believe that if they learn such a 'setup' with the correct 'entrance' and proper 'exit on a single strategy (and of course the rest of the trading industry is 'in on' these 'secrets') they would then achieve consistent profitability. This mindset really defines an almost universal near-sighted approach to trading on the part of new and aspiring retail traders. And that such an approach … is really all there is to trading. When point in fact finding a profitable methodology or 'system' of trading is not really what we find to be the biggest obstacle facing struggling traders. Ironically, the above myopic belief is actually their biggest obstacle. Many new traders find it surprising when we tell them that when it comes to longer multi-day trading … profitable trading methodologies are plentiful, and information on them is readily accessible. Not from supposed 'trading educators' of course, or silly little trading forums; that merely echo the sentiments of 1,000 failed traders. Such 'educators' usually offer little more than 'snake-oil'. At best. But truthfully, profitable strategies are almost a dime a dozen, and can be found from credible academic, scholarly and institutional sources. University sources. Sources that have thoroughly tested such approaches with both historical data, and in an ongoing live environment. In point of fact, new and aspiring traders run into a host of other problems since this simplistic view of trading causes them to ignore larger issues. First of which is defining their objective for market participation in the first place. Is it to earn an income? Earning an income from trading a smaller retail account, will require a much different approach than say, growing an account with a single intra-day trading process. Of course, that would require that new retail traders understand that mathematically, they will never, ever be able to pull in a living-income from a small $25,000 trading account. We have found that many refuse to accept this truth. And it is truth. It is not opinion. It is mathematical fact, that has been proven time and time again that you cannot pull a living-income in from a such a small retail trading account. All you need to do to confirm this for yourself, is to begin to read some material on the mathematical 'risk of ruin' scenario; and then begin to follow the reference links. Scholarly papers have been written on this topic. As stated ... it is not opinion. That is not to say that you cannot become a profitable trader, who eventually earns his living from trading. Eventually. But speaking from a mathematical standpoint, you will never be able to do that from $10,000, right out of the gate. It is possible to start with $10,000 ... and eventually get to that point. But that requires a well thought out plan. And that plan does not include earning a living from $10,000.00 Regardless, it is sufficient to say that the vast majority of new traders never consider or define their objectives. As well, they do not learn the importance of the Core Principles of Trading in that they do not develop the psychological discipline necessary to accept the discomfort of inevitable drawdown. Their expectations of return are wildly unrealistic, and such expectations exceed the performance of the best traders alive on Planet Earth. They also refuse to acknowledge that all traders, by definition, are professional gamblers. Which means that as traders, we embrace the uncertainty of binary trade events. Once again … simply stated, they do not accept and embrace these Core Principles. Instead … almost all new traders we encounter, remain fixed in the myopic concept of: “Find the 'right' trade entrance, trade exit, and thus 'setup' and 'trading system'”. Their sights remain fixated on finding 'the right' methodology. Which leads to a concept that I myself have long refered to as “method hunting”. In other words, the trader encounters a loss, or a series of losses using a methodology and mistakenly believing that this means that the 'system' or 'method' is at fault. Although that loss, or series of losses may be a completely statistical normality for that process. Yet they feel that they need to 'tweek' the process or 'hunt up' a new method. In point of fact, losses and series of losses are absolutely normal to the best of traders and best of trading methodologies. One of the worst things a new and aspiring trader can do, is try to discard a perfectly viable trading method that encountered a series of statistically normal losses in order to “hunt up a 'new method'” to avoid such discomfiture. This leads to an endless cycle and futile search for a method that avoids a series of trading losses. But naturally we admit that any trader would want a reasonable return, with as little volatility as possible. This is only natural, and as long as one avoids the above psychological 'traps', traders should strive for a good risk adjusted return. Meaning, they should wish for as little drawdown as possible, while still earning a good return. That goal, is the “Mount Everest” that all traders attempt to climb. Few succeed. Allow me to quote from one of the best Traders I have met. He said this, and it stuck with me. “Not only are losing months commonplace, but the average winning months as a percentage of equity are far below the typical retail trader expectations. It should also be noted that SINGLE MARKET (which most of you reading this are pursuing) discretionary strategies/programs with near linear returns and single digit drawdowns month to month are non existent. Really. Like, you won't find ONE in any of the databases that survived for more than a couple years, if at the time of your search you find any at all.” Please pay particular attention to that precise wording when it comes to the topic of reasonable expectations. We can assure you that their phraseology was by no means accidental. They discussed the folly of new traders seeking “SINGLE MARKET” discretionary strategies with near “linear returns and single digit drawdowns month to month”. As previously stated, it is only human and natural that ones seek “linear returns”. The concept of “linearity of returns” from a discretionary single market strategy provides a sort of 'psychological safety blanket'. If such a trader mistakenly believes this is possible … if they 'just remain disciplined' with a single discretionary strategy they will then be able to plot out their returns in the future with certainty. Of course, this does not occur in actuality. But the belief provides a goal (an impossible one) that they strive towards. Humans seek certainty. This is only natural. Because certainty provides a sense of security. As most traders zero in on a 'single strategy', with 'entrances' and 'exits', they hope and strive for this 'linear certainty'. However, as has been stated … you will not be able to trade “SINGLE MARKET” discretionary strategies with near “linear returns and single digit drawdowns month to month”. It cannot happen. As we have already stated, the above wording was both intentional, and precise. With that in mind, we will pose the question ... what if you traded multiple markets in an overall portfolio, instead of 'single markets'? What if you incorporated longer-term mechanical strategies as a part of a larger 'portfolio'? What effect would this have on your overall month to month drawdown numbers? Could so doing provide a psychological 'support' mechanism to your discretionary intra-day short-term trading efforts as the volatility of your returns is tempered out? Before we examine such questions, let's briefly turn our attention to the topic of universal trading truths Universal Trading Principles Periodicity We often find it quite humorous to hear supposed “Trading Educators” speak of 'the right time-frame' to trade stocks. They speak in such a way, as to build the belief that 'passive' investing is 'wrong' and short-term term trading is 'right'. Or … that 'passive' investing is 'right', and short-term trading is 'wrong'. You see this paradigm of thought, especially with new traders. Verifiable nonsense. That such statements are nonsense, is indisputable. Audited trading results and databases are filled with institutions that trade with long and short periodicities. It would do any new trader well, to ask themselves the question: Why do they trade both longer-term and short-term periodicities; simultaneously? And therefore, as we will soon discuss, when it comes to periodicity it is wise to accept the benefits of both long-term trading periodicities, and short-term trading periodicities as a part of a larger portfolio. In fact, we would go so far as to say that we find the concepts of 'passive' and 'active' to be objectionable to good trading thoughts and habits. There is simply 'periodicity'. A trade that lasts 2 years, is still 'a trade'. As a trade that last 20 seconds is still … in the end … just 'a trade'. That is, the accepting of future uncertain risk by exchanging one item of value, for another. And then managing the effect of that decision as the future unfolds. In fact, when new traders ask us questions on periodicity as to whether we are a “long term investor” or a “short-term trader”? We like to simply answer with a 'yes'. We look to be involved in multiple periodicities simultaneously. But that simply covers the topic of periodicity. What of the markets they trade? Markets We thus state that the overall principles of trading reach into every periodicity. But we have in the past stated that the overall principles of trading reach into every market as well. And this is another arena, where once it is common to hear new traders and supposed “trading educators” speak in a way that 'villifies' one market, and promotes another with wording similar to “It is impossible to make money in XYZ market. But in ABC markets! Profits are easier”. Again, this is verifiable nonsense. Because … again … databases are filled with institutions that trade Forex, Options, Bonds, Futures / Alternatives, Swaps, Common Stock, Private Equity, you name it … and do so profitably. Yes, various markets carry with them various 'pros' and 'cons'. Equities, or 'Common Stocks are forefront in the public consciousness when ones think of 'markets', and this drives much of the 401k business, which also helps the Mutual Fund business to thrive. Which means that stock markets carry enormous liquidity. Which is why it is quite common to hear of Funds and Institutions that trade stocks with $7 billion or more under management. Public perception drives liquidity. When one considers the speed by which your average retail trader can enter and exit a position, this ease of access drives liquidity to all time highs, and slippage on positions to all time lows. However, one can only leverage a stock portfolio so far. Futures markets, on the other hand, are far more capital efficient than stock markets could ever hope to be; simply due to the construction of Futures contracts. However, if one examines many futures markets and you set aside the notional value of the contracts being traded, one can see they are much smaller en totum, than say, stock markets, in terms of participants. Yet as stated … futures markets are more capital efficient, in terms of risk on a dollar for dollar basis. One must also consider that futures markets are split into 'contract months' which gives a trader the ability to spread positions in a variety of ways (intramarket and commodity spreads, etc.). And then there are option markets. Which as a whole, have far less liquidity on single contracts than either stocks or options. But again, since the construction of options contracts carries inherent leverage, and their worth over time as a derivative is calculated in a much different manner than either the stock or futures contract on which they are based, options carry unique benefits. It is our personal belief that the manner in which options are constructed offers traders one of the most interesting versatile and wonderful tools to create specific risk parameters at the outset of an option trade. We could go on and on discussing the advantages and disadvantages of various markets. Suffice to say, that different markets provide various pro's and cons to the individual trader. But most importantly, you will find the same principles hold true for a futures trader, as they do for an securities options trader. The same 'Core Principles' we mention above must be applied in Market Making, as they do in longer-term valuation investing. An options trader must still have reasonable expectations, just as a securities multi-day swing trader must have reasonable expectations. If the market turns against a market-maker, they must have the discipline to 'puke' the position and exit the market. Which is no different than a longer-term valuation securities investor who must abandon a position if the drawdown from his entrance exceeds the parameters of his risk model. Both the valuation securities investor, and the intra-day futures swing trader accept that no single binary position can be predicted into the future, and thus, accept that they approach the markets. Simply put, the over-riding principles of trading apply in every market as well as every periodicity. Methodology Theory Of course, methodologies differ in the edge they are trying to exploit, and look to approach participation in the markets in a variety of ways. A momentum trader tries to buy strength that has already manifested itself in price action. Whereas a intra-day futures swinger may look to buy “oversold” weakness in price action off of a particular market structure. A delta-neutral options trader looks to do neither by selling 'juiced' premium 1.75 standard deviations away from the current asset mark. There are existent market correlations that exhibit positive expectancy over time; and therefore traders who buy such correlations look to do none of the above. Equities traders who employ the "Dogs of the DOW" strategy or any of it's variants? Are looking to exploit several aspects that lean towards "edge" simultaneously (Yield, Periodicity, Correlation to the Larger Index, Price Weakness, Market Cap "Moats" all in combination with one another) Suffice to say … again … methodologies differ in the edge they are trying to exploit, and look to approach participation in the markets in a variety of ways. Therefore, we say that the same over-riding principles of trading apply no matter the periodicity, market or methodology. In the end, you still need to know how to trade. No matter the market. Dampening Volatility with a Broadened View of Trading Non-Correlative Portfolio Architecture Now let's return to the questions that we posed previously … What if you incorporated longer-term positive expectancy mechanical strategies as a part of a larger 'portfolio'; and ran them simultaneously with say ... a discretionary strategy? What effect would this have on your overall month to month drawdown numbers? Could so doing provide a psychological 'support' mechanism to your discretionary intra-day short-term trading efforts as the volatility of your returns is tempered out? The answer, quite simply, is yes. If a trader is seeking to enjoy the psychological 'boost' of lower drawdown numbers providing for a good risk adjusted return one of the easiest ways to do this, is to run processes, simultaneously that are quite different from one another. Or, to say another way, running strategies that are dissimilar to one another, or non-correlated. We refer to this as running a Non-Correlated Multiple Strategy (or Multi-Strat) Portfolio. Although a host of research has done on this topic by others, this should make logical sense. Stock investors are often counseled to “diversify” their stock holdings so that they do not expose themselves to the risk of having their portfolio's overly exposed to one sector. The rationale is understandable. If that one sector heads much lower, their entire portfolio will suffer. Whereas if they, say, had one stock exposed to Healthcare, another stock in the Energy sector, and yet another stock in the Technology sector? A severe decline in the Energy sector will not affect the portfolio as adversely as the portfolio is 'diversified'. It is only logical then, that a benefit comes from diversifying strategies as well. Running very different strategies as to both periodicity, methodology and markets. As long as each process carries with it positive expectancy over time, the results are dampened volatility in your returns for better risk-adjusted performance. If a trader is only running a longer-periodicity trend program based on stock indices experiences a range bound market such as was seen in 2015? Naturally the portfolio will suffer ill effects. However, if a trader runs a longer-periodicity mechanical trend program based on stock indices, while simultaneously running a discretionary program that sells option premium (selling calls, puts, spreads, Condors, etc), then the portfolio could have faired much better, given that 2015 was an ideal environment for selling option premium. It's the simple concept of diversification; applied to processes / strategies. The benefits are numerous. Many traders state that they enjoy a psychological benefit. They know that their success is not dependent upon one single strategy performing well. Month to month drawdown numbers can be much smaller than those those running a single strategy. Keep it Simple During Implementation What is left then, is for a trader to determine how to construct such a portfolio? What processes will the portfolio contain? What percentage weighting will each process be given? That is up to each trader to decide. The over-riding principle to keep in mind, is quite simply, keep the processes different enough from one another, so as to reap the benefits of non-correlation. For example one could run a portfolio that is comprised of … 20% Income Strategy – Periodicity: 3 years and longer – Markets: Stocks and ETF's 20% Long Flat Stock Index Strategy – Periodicity: 1 year – Markets: Stock Index ETF. 20% Discretionary Intra-day Strategy – Periodicity: Intraday - Markets: Futures 40% Option Strategies – Periodicity: Approx. 45 Days – Markets: Stock Options or 10% Long Only Stock Portfolio – Periodicity: 1 year – Markets: Individual Common Stock 12% Discretionary Intra-day Trading – Periodicity: Intraday – Markets: Futures 68% Correlation Strategies – Periodicity: 30 Day Review – Markets: Index ETF's 10% Option Strategies – Periodicity: Approx. 45 Days – Markets: Stock Options Our point is not to stress than one mix is “better” than another; by means of some formula. Any trader needs to first define their objective with the portfolio as a whole, and this will guide other decisions. Our point, is that processes should be different enough in terms of periodicity, market and process, each from the other, so as to reap the benefits of strategy non-correlation. The second over-riding principle that we would like to stress? Is to keep it simple. It is only logical, that if you put too many complicated processes together, one can become over-whelmed. As experienced traders, we may run 10 different strategies within a portfolio. Experience has also taught us, that trying to demonstrate this to new traders, leads to ones becoming overwhelmed. So to start out, a trader could simply track out a hypothetical series of trades in two simple processes to see the benefits of the above principles. A Simple Hypothetical, Live Example It should be noted that what follows are purposefully focused on educational value only and are NOT necessarily an actual live trading process that we follow. Why? When I trade for myself I will tell you flatly, that I seek more variables that I believe give me edge. But that in no way should be taken to mean that "I have the secret formula, and others do not". I have found over the years, that if I show newer and struggling traders everything that I do, they often become lost, or worse ... misinterpreting some of what I do, trying to 'copy' me, and they end up lost in minutiae that simply does not matter. Those are details and variables that I use because they fit my particular risk tolerances and my particular psychology. What does matter is learning some of the most important lessons that new traders can learn; and therefore, we are going to intentionally keep this very simple in order to help newer and struggling traders focus in on the concept of non-correlated portfolio construction. The above principles can be simply illustrated using a simple, hypothetical mix of ... 50% Long Stock Index - Periodicity: 1 Month - Markets: Micro ES Futures - Methodology Theory: Long / Flat. If you worked simple math? The SPY could be used just as easily 50% Option Processes - Periodicity: Weekly - Markets: SPX Options - Methodology Theory: Non-Directional (via Spreads) With which we hope to illustrate here at ET with live examples. I am keeping this, intentionally simple to drive home the principle of non-correlation. Long-Flat Stock Index Process Monthly Chart - SPX 13 Period EMA The above monthly chart illustrates the price action of the SPX back to 1998. With a 13 period Exponential Moving Average (EMA). It's this simple. For this portion of the process of a Long-Flat Stock Index Program, one is simply long the /ES for that month that the price closes for that month above the 13 period EMA (Or the SPY, or the Micro ES, or whatever one chooses for Capital Efficiency reasons) You then wait for the next month's close. If it closes above the 13 Period EMA, then you remain long the chosen instrument If price closes below the 13 period EMA? Then you go straight to cash for that month, for that half of the process. That's really all there is to it. A few comments regarding the this process. The above only works as it does, as we have backed the periodicity out to a monthly view. As well, drawdown numbers with this process will be significantly higher, requiring a larger account from which to trade. But again, that depends on the instrument (SP, /ES, Micro ES or SPY) one chooses for their own capital efficiency reasons. We will keep track of drawdown numbers and other important stats as we move into the future. But since this is the S&P 500 Index product, and one is long this product for 30 days? Larger capital is required to be able to withstand the drawdown periods. Of course, if a trader does not have access to that sort of capital, it would be a very simple matter to convert this process to a multi-day ETF process, using the SPY and SPY options. Also note, that the 13 period EMA is not "technical analysis to predict the future". "Prediction of the future" is nonsensical in my view, and flies in the face of all known science when dealing with complex systems such as capital markets. That 13 period EMA is only an indication of what has happened in the past. The decision to ... say ... stay long in the case of a close above the 13 period EMA? Is a trend-based decision, based on historical data. Positive expectancy occurs when the market trends for long periods of time. But a trader could dump the EMA, and trade a smaller time-frame via market structures. No process is 'perfect'. It's simply "a" process. Please note 2015. In such an environment ... (which again, one cannot 'predict) ... this process endures much 'chop'. This process works well, in long, trending markets. From 1991 to 2000? It captures the trend of the up-move. From 2000 to 2002, this process goes 'straight to flat cash', and avoids the large drawdown experienced during that time period. It again catches all of the move from 2003 to 2007; and avoids the drawdown of 2008 and the Great Recession, by going to flat cash. But no process is perfect. The nemesis of this process is time periods such as 2015 (which again, one cannot 'predict) where the market chops in large swings for much of the year. The solution to that problem? There is none for this single mechanical process. Without method-hunting, one must simple endure the drawdown, and continue grinding forward. Thus, we arrive at introducing a second process ... Option Premium Process The above simplified Long-Flat Stock Index Process is quite obviously a directional process. And therefore if we follow the principles of non-correlation, we will look for a process from which we derive positive expectancy by doing something quite different. Something non-correlated. And therefore, for the same periodicity, we will be looking to sell Call Spreads as close to 2 sigma (2 standard deviations) as we can find, against the very same index, using the SPX Option market. If you are new to options? You can find a more detailed conversation regarding options in posts to follow this one. Whereas the Long-Flat Stock Index Process is mechanical, directional and on a longer periodicity? For selling options, we will look to do nearly the opposite. Sell option premium in a discretionary manner, 1.5 sigma to 2 sigma (1.5 standard deviations to 2 standard deviations away) on a 7 day basis. But we will look to sell this premium in nearly the opposite manner of our Long-Flat Process. If the Long-Flat Process goes to cash? We will continue to look to sell option premium in those environments. Conclusion The entire idea, is that you have two different processes. Both are thought to have positive expectancy over time. But they accomplish this in very different ways, and in almost exactly the opposite directional manner. If the market enters a time period such as 2007 to early 2009? Selling Option Premium can still function. The Long-Flat process will simply go to cash. If the market trends for long periods of time, as from 2011 to 2014? The Long-Flat process would prove profitable. While selling option premium, while it is possible to remain profitable, will have a more difficult time. If the market experiences 'chop' such as in 2015? Obviously the Long-Flat Process will encounter drawdown. But 2015 was absolutely ideal for option sellers. There is no 'guessing' at 'timing the market' with the above processes working in conjunction with one another. It is absolutely intentional that one process strengths, is trying to mitigate the other process weaknesses. And the only way to do this? Is to intentionally seek positions in each process that act in a manner opposite to the other. Trying to second guess this principles can ruin the effectiveness of running non-correlative strategies. As stated at the outset, there is no one single 'secret strategy' and the myopic view and belief in such a 'secret' is what leads to the downfall of many aspiring traders. Ironically enough, Implementing non-correlated processes as to market, periodicity and methodology is one of the easiest ways that a trader can achieve lower drawdowns, and a smoothed out equity curve. We will see this process demonstrated, with a built tear-sheet, in real time, as we move forward, and links, explaining everything as we go.
As the opportunity arises (or sometimes, the lack of opportunity) I will be looking to post real-time, hypothetical examples of multi-day trades that highlight the concepts of non-correlated market, periodicity and strategy diversification to smooth out the volatility of one's returns. We can do this by either posting annotated charts, text commentary, or at times, perhaps a video or audio entry. I will post a spreadsheet, that I keep, for this example. Please feel free to ask questions, or even make a comment underneath each example. IMPORTANT: These examples are purposefully focused on educational value only and are NOT necessarily actual live trades. Why? When I trade for myself I will tell you flatly, that I seek more variables that I believe give me edge. But that in NO WAY should be taken to mean that "I have the secret formula, and others do not". I have found over the years, that if I show newer and struggling traders everything that I do, they often become lost, or worse ... misinterpreting some of what I do, trying to 'copy' me, and they end up lost in minutiae that simply does not matter. Those are details and variables that I use because they fit my particular risk tolerances and my particular psychology. What does matter is learning some of the most important lessons that new traders can learn ... How to not make any money for a smaller periodicity, while staying involved (Yes, you read that right) How to grind. How to not beat the S&P 500 Index for a given periodicity, and perhaps, simply stay flat for a time. If you have lost 10%, 20%, 50% or even 90% of your account value and you have come to this thread? Staying at 0% means you are destroying your previous returns. Much less, the positive expectancy after 0%, that we plan on demonstrating. Remember: If you can grind for 4 months, and you can stay at 0% ... how many Home-Runs or Grand Slams do you need to hit to see a better return? The examples are kept intentionally simple; to highlight the principle that does matter. Non-correlated market, periodicity and strategy diversification. Thus the hope is that once a trader understand the power of true non-correlative strategies and has that over-riding principle firmly in mind and in hand, they can apply the power of non-correlation in a way with which they may personally be comfortable, according to their own objectives, risk tolerances, psychology, etc. As well, I hope to highlight and stress what can be found within the Core Principles mentioned at the outset of this thread ... which is that whether someone is trading equities, making markets in futures, selling option premium, intra-day swinging in futures or establishing a multi-day swing position ... again ... "It is all the same thing" and those Core Principles are at the beating heart of all trading. There will be repetition. If one jumps from process to process out of boredom, trying to avoid the pain of drawdown, or apophenia by definition means that you will never see positive expectancy from any process if you jump away from a process because you are method-hunting. It will be a grind. That's the point.
Great post - thanks for the post. We used to have a member here who ran a non-correlated portfolio for a large HF, regrettably he moved on. I think many of us miss his content/posts.
Any particular reason to pay for the long leg of a spread when you're already long the underlying? Seems like a waste of money. Also, selling at 2-sigma would generate very small premium for - again - something that's already covered. I see the point of the overall strategy, and agree that the theory would be worth exploring, but the implementation you've described does not seem like it would provide any sort of reasonable gains.
I could sell it naked. But I have to think about how any one may be reading this. Between you and I? When people read about options? They get ... weird? You know? I mean, it seems like you know what I mean. And yes, you're right. Long the underlying, then short the calls. It's not a straight Covered Call strategy, as it does different things when the long-flat is flat (It keeps selling the call spreads during those flat periods). But if it's something I noticed? Is that when people learn options? They start doing really stupid things. Optionsellers was the most extreme example of this. But ... ya know ... sorta 'like' that. Its like they become addicted to the idea of bringing in credit by selling Calls and then all sense goes out the window. So we figured that if we are going to demonstrate this? It's best to do it by defining the risk. Simply because we've noticed that people learn enough, to do some really stupid things.
There's no "sorta" about it. It is confirmed. I've watched BlueWater try to show me his tables and how "easy" it is to just pick a good entry based on numbers with certain dates and IV and cost at strikes while I whine to him that my head is spinning, and then hear him whine to me when I show him a future chart and he says his head is spinning about "direction". The whole lot of you are Jack Nicholson, in more ways than one.
I kinda see your point. But then, I kinda don't. People are going to do stupid things. And from what I've noticed, trading reaches deep down into their gonads and makes them do stupid things they haven't done since they were pimply teenagers hopped up on/half-crazy from testosterone. Neither you, nor I, nor anyone in this world is going to stop them. But if you're trying to make the point that your strategy works, and is solidly beneficial, then it would behoove you to make it as efficient as possible and really showcase it. That would have value (assuming your concept is right, that is ). [laugh] You've got that right. There are certain places where "stupid" straps a rocket engine to its back and starts playing with matches. Leverage in FX, piling up risk units in options, futures without stops... it's just an extension of that wild-ass excitement of playing with money without adult supervision. I don't know. I just think that trying to prevent them is a vain hope - and may wreck your project. I hope I'm wrong. Give it a shot, and good luck!