Lets develop a strategy

#1
Is it just me or all evolved (people with enough experience of getting the hands burnt) people have realized that there is no Holy Grail in trading.

So how do u earn money in a field where there is no certainty.

Charlie Munger quotes a famous mathematician named 'Jacobi'. When ever you have trouble finding a solution to a problem, INVERT it on its head and the solution will pop out.

While Jacobi did that for math problems, turns out this strategy works for anything in LIFE.

Using the Invert analyses, I asked myself what is the most certain thing happening in the stock market

I realized that a) insiders are earning truck loads of money while SEBI is busy shagging and B) 90% of the OTM calls and PUTS expire worthless.

While I cannot do anything about A. It is B that can be worked out profitably.

Come to think of it, even before the strategy is formulated, we single out (screening) a scrip which has historically 90% chances of going in one direction only.

Now Step 2.

As per ed seycota only 03 things decide ur result in trading. Risk, payoff and luck and out of these 03, risk is the only thing u can manage.

To manage risk, we employ a ATR (2.5, 5) 2.5 is the multiplier and 5 is the period which acts as a trailing stop loss for our positions. (can be optimized).

timeframe needs to be decided basis individuals appetite, risk tolerance and corpus size.

basis the points to stop loss, we risk 2-3% of our corpus on any given trade.

Step 3. Instead of trading OTM calls and puts all the time. We would trade them in the last 05 days before expiration. The accelerated fall happens in the last 05 days (this no. of days can be optimized)

so there we have it; a simple system with a backdrop of 90% movement in our direction. Even with that assurance a money management discipline of not losing more than 2% on any trade.

Now for the logistics.

I have the AFL which does the ATR sell thing. What I need is the code which tells the AMIBROKER to do it only on last 05 days (optimizable) of expiration


Once we have that, we can back test it for the last 10 odd years of data on options lets say 300 points away from CMP and see if it has been a consistent money churner or not. and also what has been a draw down.

Please help me in my endeavour. I think on paper at least this looks like a winner. ATR buy/sell any ways is a trend following system, so one gud trend pays for em all and if there is 90% probability of direction, it looks like a no brainer 2 me.


your comments are welcome. Back testing and coding is more welcome.

warm regards,

Manish Dhawan.
Mystic Funds
 

biggles

Active Member
#3
Trading With ATR
The question is how to profit from the volatility cycle. While the ATR doesn't tell us in which direction the breakout will occur, it can be added to the closing price and one can buy whenever the next day's price trades above that value. Trading signals occur relatively infrequently, but usually spot significant breakout points. The logic behind these signals is that whenever price closes more than an ATR above the most recent close, a change in volatility has occurred. Taking a long position is a bet that the stock will follow through in the upward direction.
 
#4
no m friend; I m not even TALKING about buying. The underlying hypothesis is that 300 points away strikes will expire worth less; so we will sell them basis our ATR or super trend or whatever trend following system and not buy them.
 

rkkarnani

Well-Known Member
#6
Hi, I am still grappling with the basics in Option, so my Post may not be too relevant.
I also realised this that the best way to earn money in Options is to SELL them, but there remains the risk. Did buy options on N occassions and 100% of them expired worthless. Never tried selling Options. Have always been told that Selling Options carry an unlimited risk so never ventured. Though I did do Paper Trades on Selling Options and was successful 90% of the time !
I was selling OTM options and making money every month but whenever my Trade did not click, the OTM option in one month would eat away the Profits accumulated in past 3/4 months as Profit being limited and risk being unlimited. I realised that if I can manage risk I can succeed. Looked around TJ and read every thread about Options. Did get to read quiet a few very educative Posts on options by Dan and others. But my 'basics' being weak could not grasp much out of it.
Now coming to the main reason for my posting : Saw that you are trying to have some system to SELL OTM options, hence this Post of mine.

I have a Chandelier Stop in Metastock, which is similar to Supertrend. If we apply Supertrend on EOD Nifty Futures and sell the Options nearest to the Supertrend Value whenever a crossover happens we can earn money. I observed that the crossover happens only once in a month and we need to cash this. When it crosses again we need to manage the risk !
I am posting a chart from Jan 2013. Only in March it crossed the Chandelier stop twice !

 

jamit_05

Well-Known Member
#8
Fair enough. 90% of options expire worthless. So we have worked out the good part. Do we have an estimate as to how much do we stand to lose when the other 10% happens?

Now, one could say... "That is in my control since I can put a stop loss to it".

That too... Fair enough. But, the moment you start using the Stop Loss... this 90% will come down a few notches.

All I am saying is, Options as an instrument has a very savvy design, which ensures two things:

1) Market Makers, who block very (very) large capital to provide liquidity, get paid by Theta, the Time Decay. The are mostly interested in selling options to Hedgers.

2) Stock holders get to hedge their positions for a price. They are mostly buyers.

Now, I am not willing to believe that this Design (of supercomputers guided by Black-Scholes model) can be "hacked" by a simplistic observation.

In short, my point is Option Trading too is bound by the equations of Risk and Reward. There are no free lunches... at least not in plain-sight.
 

DanPickUp

Well-Known Member
#9
Fair enough. 90% of options expire worthless. So we have worked out the good part. Do we have an estimate as to how much do we stand to lose when the other 10% happens?

Now, one could say... "That is in my control since I can put a stop loss to it".

That too... Fair enough. But, the moment you start using the Stop Loss... this 90% will come down a few notches. and a bit more :lol:

All I am saying is, Options as an instrument has a very savvy design, which ensures two things:

1) Market Makers, who block very (very) large capital to provide liquidity, get paid by Theta, the Time Decay. The are mostly interested in selling options to Hedgers.

2) Stock holders get to hedge their positions for a price. They are mostly buyers.

Now, I am not willing to believe that this Design (of supercomputers guided by Black-Scholes model) can be "hacked" by a simplistic observation.

In short, my point is Option Trading too is bound by the equations of Risk and Reward. There are no free lunches... at least not in plain-sight.
You nailed it. :thumb:. No more comments are needed on that.
 

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