A proposal for testing black-box systems

Here are 2 realistic stocks: XLU and OIL. After running your system, what will you get on them?

 

Stock Volatility and Risk for Beginners

For example here one can find the volatilities of stocks and indices:
http://www.optionstrategist.com/calculators/free-volatility-data

One can also compute it yourself if one collects the daily closing stock prices
in a database or Excel table.

Below, the column "hv100" means the historical volatility over the last 100 days.

IBM is of course the computer giant company.
SPY is the S&P500 index, ie the average index over 500 companies listed in the S&P list.

Code:

Symbol (option symbols)           hv20  hv50 hv100    DATE   curiv Days/Percentile Close
----------------------------------------------------------------------------------------
IBM                                 32    27    25  160219   21.85   600/ 87%ile  133.08
SPY                                 22    21    18  160219   16.77   600/ 88%ile  192.00

Interpretation:

Investing in IBM has a 25% risk over a period of 100 days, ie. one can expect that after 100 days
the stock price will be most probably between +25% and -25% around the current mean price as of today ($133.08), that is between $99.81 and $166.35.


And the following is the formula for computing the daily volatility (using year = 252 trading days):
DailyVola% = AnnualVola% * sqrt(1 / 252)

If we assume that the annual volatility of IBM is 25% then:
DailyVola% = 25 * sqrt(1 / 252) = 1.57%

With that formula one can also compute the weekly vola:
WeeklyVola% = 25 * sqrt(5 / 252) = 3.52%

And of course also the monthly vola:
MonthlyVola% = 25 * sqrt(21 / 252) = 7.22%

As said: volatility means the deviation in percent around the mean price, ie. up or down.
As said: vola% can also be interpreted as the risk% of the investment.

 

My system is a so called basket trading system; it uses a basket of many stocks, at least 15 different titles (10 actively traded, 5 are spare).
This has todo with diversification, ie. sharing/distributing the risks equally among all titles.
And: it is not a stock trading system, it's an options trading system.
I have posted some annual results using upto 57 titles, just look up in the other thread.

 

Don't you want to feed your black box system with any stock data?

 

Sure I will, I'm currently working on the IB API connection for this.

Btw, in the previous posting I wrote 57, but that is a typo, it should be 67.

 

So run it on XLU and OIL.

 

As said these 2 are not enough, it would trade at least 8 more companies.
As said: it is an options system.
As said: this is a basket or portfolio system, it does not prefer any single company; what counts is the net result it makes out of the basket as a whole.
But yes, I can add these 2 to the list.

 

So it does not expect to work on any arbitrary stock, right?

 

I don't understand. How do you come to such a conclusion?
Of course does it work with any stock if the stock just fullfills some basic criteria: liquidity & volume, and a moderate volatility. Ie. it should not trade flat the whole day or week, because in this case there is no movement and the options lose time value... (but the system detects such cases). The other extreme, too much volatility, isn't healty as well because that means too much risk, ie. the drawdown can get bigger. Historical stock volatility in the range of about 10 to 40% is acceptable for my own risk tolerance.

I guess you mean by "winner or loser" that the stock rises or falls.
Short answer: yes, because it trades both sides (by using long Calls and long Puts).

 

So go ahead, run it on XLU & OIL without all your other add-ons.