letting your losers run and limiting winners

Discussion in 'Options' started by kevagonia, Mar 1, 2018.

  1. New Academic Research Finds Options-Based Investment Strategies Outperform Long Stock Strategy
    Covered Combination Strategy Yields Highest Performance Over 10-year Period

    CHICAGO (May 8, 2015) - The Options Industry Council (OIC) announced today the release of a new academic research study, “The Performance of Options-Based Investment Strategies: Evidence for Individual Stocks During 2003-2013," conducted by Professors Michael L. Hemler, University of Notre Dame's Mendoza College of Business, and Thomas W. Miller, Jr., Mississippi State University. The study, which was supported by OIC, found that some options-based portfolio strategies seemingly outperform long stock and improve the risk-return tradeoff of long equity portfolios over time. The authors presented the results of the study today at the 2015 Financial Advisors Forum held in conjunction with the 33rd Annual Options Industry Conference taking place this week in Miami Beach, Florida.

    This research is novel in that it compares the performance of several different options strategies, rather than a single strategy, using equity options. A distinctive feature of this study is its exploration of the covered combination strategy and early exercise. The study examined the relative performance of five different investment strategies, four options strategies and a long equity strategy, for individual stocks widely held in 401(k) plans from 2003 through 2013. The options strategies used in the study include the covered call, protective put, collar and covered combination. Of these five strategies, the covered combination, which is a multi-leg options strategy that combines the covered call and the cash-secured put, outperformed the others using four standard risk-adjusted performance measures: Sharpe ratio, Jensen’s alpha, Treynor ratio, and Sortino ratio.

    “We applaud the work of Professors Hemler and Miller to create greater awareness and understanding of how specific options strategies can be used to enhance investment returns as well as reduce risk in up, down, and flat markets,” said Scot Warren, OCC Executive Vice President of Business Development and OIC. “OIC is proud to support this study and will use the research to further our efforts to educate financial advisors and investors about the benefits of options.”

    To view the paper and presentation, visit: http://www.optionseducation.org/options_based_investment_strategies_2015.html
    #21     Mar 1, 2018
    kevagonia and ironchef like this.
  2. schweiz


    IMO "you can't go broke taking a profit" is not correct for the following reason:

    If you develop a good trading strategy this strategy will try to buy and sell at the optimal points to deliver the maximal profit in the long term. If your strategy is good every manual interaction will in the long term decrease your profits. Why? Because if you start to interact on intuition, you will have some lucky shots but you will also sometimes miss huge moves. And missing these huge moves will cost you more then the additional profits from your lucky shots. So make a good strategy and ALWAYS follow that strategy or you will lose money in the long term.

    If you make more profits by following your intuition it means your strategy should be reviewed because strategies should always outperform intuition in the long term.
    Last edited: Mar 2, 2018
    #22     Mar 2, 2018
  3. ironchef


    Thank you for the post and the link. Very thought provoking. Turning CAPM on its head?
    #23     Mar 2, 2018
  4. ktm


    Today was a good example of "freezing the dice".

    I dropped a (one day) 10 delta strangle on the SP early this morning (2625P & 2695C) for $5 with the futures sitting at 2665. I could have closed it for $2.50 late morning, but I wanted some more out of it. I off loaded the put for .25 a bit after lunch, then the call came to me a few hours later and I closed it at .25.

    Near the close we start steaming upward and the call goes back well over $1. It could have easily went to $5 or $10 had we continued in the last few minutes. When you have 90% of your max profit on these spreads, it doesn't make sense to sit around waiting for that quarter when the whole thing could blow up later in the trade.

    I was probably too greedy and should have cut it at 2.50 earlier in the day. Maybe I got away with it...this time.
    #24     Mar 2, 2018
    kevagonia likes this.
  5. I think the point of the 50% number was specifically for spreads its possible to achieve that before expiration in spreads anything more than that before expiration it has to be deep ITM/OTM and sometimes you still wont see higher than a maybe a 60% profit.
    #25     Mar 4, 2018
  6. rtw


    ok, man, here it goes.

    when selling vertical spreads profit as a function of the price of the underlying will be convex at the beginning and concave at the end. it will also be convex first and then concave with respect to time erosion.

    so, you can make your own studies or consult those that others have carried out and you will see that cumulative profit will be far greater when the strategy is to close this kind of trades when 50% of profit is available and then immediately open another similar position (you get faster profit per trade and over 365 days you make more trades) that if you were to hold until expiration (the last % of profits are slower and also you make far less trades).
    #26     Mar 4, 2018
  7. yeah I thin this quote applies... to other things quite well.
    #27     Mar 5, 2018
  8. I have noted this for my: rules to live by notebook. It is covered in a floral print.
    #28     Mar 5, 2018
    #29     Mar 5, 2018
  10. Buy1Sell2


    This posting from Schweiz shows how Prudent Risk Management employed by the individual following their rules, is the answer to successful trading:

    You can go broke by taking a profit. It all depends of the stats of your tradingsystem.
    If you have 40% winners, 60% losers, average profit 200$ and average loss 100$, you make money following your system rules.
    If you decide not to follow the rules and to take profits each time you make 100$, your total result will be a loss. So taking profits can get you broke.
    #30     Mar 5, 2018