Beginner's Option Trading System Critique

Discussion in 'Options' started by jabanico, Dec 29, 2011.

  1. jabanico


    I'm a novice equities trader and am learning options.

    I'm familiar with Technical Analysis and am curious about the recommended options strategies for newbies, so I bought an educational boardgame from Trading Pursuits. The strategy seems pretty ok.

    It recommends that all of the following are met for entry:
    1. 2-month upward or downward trend for call or put respectively
    2. shorter MA has crossed longer MA to the right direction
    3. candlestick's body is within the upper or lower half of the Bollinger Band

    It recommends the any of the following are met for exit:
    1. Exit 100% if more than 50% of the body goes out of the Bollinger Band, and closes outside of the band.
    2. Exit 100% if 25% stop loss is met.
    3. Exit 30% after reaching 30% profit with Option bid price. Exit next 30% after reaching 60% profit with Option bid price. For the remaining, wait for #1 or #2.

    It looks like the system is designed to narrow down to just a handful of high probablility setups, and to exit quickly (especially when the Bollinger band is narrow.)

    What are the shortcomings of the entry and exit conditions of this strategy? How can it be improved to include position sizing and make it more robust?

    I figured even if the entry signals will be triggered only infrequently, if the probability for success is high, then that's good enough because there's enough leverage in options trading to compensate for longer "idle" times.

  2. spindr0


    All technical indicators are have usage deficiences.

    For example, If MA components are long, crossovers are late in/late out. If short, it's whipsaw city.

    A MACD crossover system can deceive you (buying below zero, selling above zero) so you have to use a reference in the price domain to keep it honest.

    Bollinger Bands are volatility measurements. Using them for exit points will be very variable because in more volatile times the bands are wider and therefore so too will be your stops.

    All of these points are irrelevant since you're combining them into a trading system. The only way to know the net result is to backtest the system. Then, to make the system more robust, optimize the indicators. Then test it on other data sets.

    While you're likely to get some terrific results for individual back tests, you're not likely to find that they're effective because they're merely hindsight views telling you where you've been and the optimal periodicity of MA's, etc. varies from UL to UL and you'll never know what that is going forward.

    What you'll eventually find out is that trend following indicators work in trending markets and oscillators will work in oscillating markets but neither will work in the other market... and there's no indicator that will tell you which one you should be using. :)
  3. ==============
    Good points,Dr. SP:cool:

    1a]I like Mr John Bollinger;
    he noted stocks are like sheep, they like to travel in herds/sectors:D But frankly Mr. Jabaz ,your Bollinger exit rule most probably gets you out of a trend much, much too early.[MSFT in uptrend 1990s,MSFT in downtrend 2008/downtrend2009]SPY, SLV,silver GLD...BAC, C.............................................................

    1b#50] Two months or 50 days is a great time frame i use it much.Mr Bill O'Neill/IBD likes it also. But actually 200 days is more important. For example liquid QQQ & QQQ call options looks like a a buy for sure, on any time frame today??? But i wouldnt buy calls , because the all time high is a $120 area.[50% off QQQ$120 level is $60 +/, not a prediction]

    However if a relative wants to give you or me a late Christmas gift, QQQ near/in the money calls would be a good gift:D But be ready to sell around $60.58/+ or 59.778 area. Not a prediction.

    PS. Books are a good buy, most maybe returned if needed.Partial disclosure derivatives are not suitible for all investors& I may,or may not have a position in something noted.LOL

    Wisdom is profitable to direct.