That's what I've been trying to do, understand each step. It matters a lot to me that I know how it works. I've pulled every single book on trend following and algorithmic trading from the British library, but there are no formal treatments anywhere.
Hi guys, I am new in this forum. Usually I am not a forum kind of guy, but my passion is trading and I am fascinated about this thread. My admiration goes to globalarbtrader. Before reading this I would not believe an automated trading strategy works. Big aha-moment for me. Thank you for posting and thank you for your blog! I trade almost exclusively Options. I collect Theta, shorting Vol with static short Delta in major indices for downside protection. Since it is more a probablistic approach I don't trade trends at all. I would like to expend my knowledge in trading trends aswell and I would be very interested to hear what kind of instruments or indicators you use that defines a trend? What tells you that a trend is starting? I would really appreciate your answer!
I use a few different ways: exponentially weighted moving average crossovers and a (sort of) breakout system that is described here. it is more a probablistic approach I'm curious - what exactly does that mean? GAT
Thank you for your answer! I use delta as a proximation for % for an option the be OTM. Basicaly I short options on liquid underlyings around 16-35 Deltas. The amount of deltas I take depends on how much directional exposure I want. Since I am not good at picking directions, most of the time I go with the strangle. The main goal is to collect premium in form of theta and (hopefully) decrease in impl. vol by choosing options with a high chance of expiring OTM. That's what I mean with "probablistic". Since that leaves me vulnerable for crashes, I always carry short "static" delta to offset those loses. I hope that makes more sense to you. I will check your post right now.
Right... but how do you calculate the probability of something expiring OTM? Obviously the wider the strangle the more chance it will expire OTM, but the lower the premium. If you just take the implied vols off your strangle legs then that will give you the implied probability. What I think you are really doing is taking an opinion on the path of the price, and from that you say what is the best short vol trade to put on (perhaps based on where the vol surface is richest, or where implied vol is very high compared to recent realised vol, or looking at chicken entrails it doesn't matter). You can dress it up and say you are looking for the highest probability trade, but you're basically trying to predict something. Let me be frank: "probabilistic" is a label that irritates me because it implies a degree of confidence and control that is actually absent in all forms of financial speculation. When I buy a future I think the probability that it will go up is higher than the probability it will go down. Trying to quantify that probability is completely meaningless. Vol trading is no different. Sorry if that came across as rude. GAT
Yes. I am trying to predict a decrease in implied vol (IV). IV is mean reverting. If I enter a trade when IV is high relative to itself, there is a good chance, that IV will decrease back to normal levels. While I wait for that to happen, Theta works in my favor. I get paid waiting for the IV contraction. No offense taken! I have to agree and disagree with you on this one. In general I would say you are correct. There is no chance I know where price or Vol will go tomorrow. It can go up tomorrow or down. I don't know. But odds are in my favor when IV is "relative" high. There is just a certain amount of IV an underlying can have. GDX is a good example. I traded GDX from Jan - Apr just with Short Strangles. IV was before the Election in mid-high 40s. After that, it got crushed and fell under 40. What were the chances afterwards, that GDX IV would get as high as it was around the Election? I don't know. But I knew that the probability of an IV decrease, were higher then an increase. If I would have picked a direction, I could have been completly wrong. GDX was profitable for me in the first months of this year. Now IV is at their lows with 30%. I don't touch it now. Maybe just directionly with a short put. But there are better trades out there now (Silver and Wheat) I have started to learn Python because of you!
@isotope1 is correct: https://www.gov.uk/capital-gains-tax/losses In practice it's probably safer, if you can, to tactically use your entire CGT allowance every year; just in case the government withdraws this option at some point. The situation for those whose trading is classified as income, rather than capital gains, is much more complicated. GAT
@globalarbtrader Did you have a terrible day today? I'm down 10% in one day, which is a bit scary. I'm going to reduce my annual vol from .3 to .25; not overly comfortable with these swings.