Setting all these differential equations and models and theories aside, all it comes down to is designing positions to make profit. I have perused various threads on this forum; most recently, the DITM (guts) thread. I have long been wondering: Is it possible to capture every market move with an option strategy? There is no need to prove that the market moves up and down. In the case of DITM guts (assume delta close to unity), if the market moves up, the call makes money; and when the market moves down, the put makes money. Unfortunately, the other option will lose just as much money; the loss is aggravated by bid/ask spread and commission. Is it possible to have opposing positions similar to the calls and puts in guts, but with the except that when one makes money, the other does not lose money or loses very little? (This is my previous post about "direction-biased delta.") If we can do this, then we are in good position to capture every market moves. Since this can mean serious windfall profit, somehow I feel it is not possible, or that arbitrage will arise. Can someone prove it is not mathematically possible ?
As a trader who doesn't trade options I would ask a different question: Is capturing every market move desirable? In my experience, many traders try to capture too many moves. One of our biggest advantages as traders is being able to choose those opportunities with the highest expected reward. But I will watch for the technical answer to your question with interest.
A qualification on my original post: not capturing every move of the market, but every MAJOR move of the market, such as any significant retracements.
It is possible , that is what trend followers do , they can virtually catch every major move. But the ( drawdown+other trading cost ) of trendfollowing may be substantial. It is same for option and futures trading.
Trend following, I believe, is much based on technical analysis, which is a discipline I have mostly abandoned through my own experience. ( http://www.amazon.com/Evidence-Base...2989602?ie=UTF8&s=books&qid=1181459838&sr=1-1 ) What I am trying to design is a strategy that captures market swings without having to resort to much TA, or at least in theory.
Exactly, many traders try to catch too many moves. You have to find the optimal size of the moves to have maximum profit and minimal drawdown+other trading cost. The cost of trendfollowing does not have to be substantial. If you can increase the average size of the moves, the profit will increase more than proportional. So bigger moves lead to relatively bigger profits. See the attachment. If you compare the relation between the move and the cost (sllippage and commissions, in this case in the ES futures) you will see that the increase in profit is bigger than the increase in move. The advantage gets smaller when the size of the move continues to increase. Second thing to analyse is the distribution of your profits. How many trades of each size do you have? By combining the frequency of each size of moves with the profits, you can have an idea of the optimal system.