Thank you for sharing this! I appreciate it as it gives me the possibility to compare with what I'm using. If you are using four metals this means 4% per instrument. Energies two instruments, so 4% per instrument. STIR 4%. If I remember correctly are you using a larger number of instruments in the other classes, so the percentage per instrument will be lower. I used the handicraft method which you describe in your book. However, I saw in the appendix that the correlation between STIR and bonds is 0.5. And the correlation between equities and Vol 0.6. I thought that those correlations were not extremely high so I did not cluster these into "superclasses". Which made me end up with equal weight for each of the classes you mention. Now, after running the system for two years and having gained some more insight in these instruments, I start to see that it does make sense to create such superclasses. Later in time, when IB raised margin requirements on V2TX, I decided to reduce its weight (I don't use VIX as the contract size and associated value volatility is too large for my account). I use 5% for it currently. So that was not driven by portfolio optimization, but by margin consumption. High usage of margin by V2TX prevented other positions to be opened or expanded as IB started blocking order lines. Thus causing a deviation between the desired portfolio and the actual portfolio. By trial and error I found that this deviation became negligible when using 5% weight for V2TX.
I don't know what anyone does currently but I can tell you what has been done in the past and / or researched. Firstly it's not obvious what you mean. Do you mean (a) trend following, where a short option position is the underlying market? or (b) using options to do trend following rather than buying / selling delta 1 instruments like futures? For (a) well I guess I trend follow the VIX so it sort of makes sense. For b) It makes some sense to do trend following by buying calls or puts; then if the trend reverses you don't need to cut your position, you just watch your premium leak away, and shrug your shoulders. In many ways trend following has the same payoff profile as a long strangle, but it tends to be cheaper since you're effectively buying realised vol rather than paying for implied vol. Doing trend following by selling options then makes no sense at all. GAT
How do you control your maximum loss trading a position which is 100 times larger? What would this loss be if markets dropped/increased by 20% on a single day, like in 1987? What would happen if you did that with CHF futures on the 15th/January/2015 ?