A newbie's index option journal

Thanks for your input Jeff.

A while ago, I did some tests to include STOPs as part of the trading model but it did not produce a result as good as a non-stop model. In the non-stop scenario, I limited capital per trade to about 7 or 8% of the overall capital. And it recalculates every time as the asset increased or decreased.

The model was working because historically speaking, the model has a semi-high accuracy (72%) and there were only about 1 or 2 "total loss" trade in any given year from 2000 to 2006.

However, the recent drop and your post gave me another thought about the STOP issue. The reason is that there's no guarantee that there will be only 1 or 2 total loss trade per year going forward, and the drop of accuracy (now 68%) certainly doesn't look too good.

I have spent the weekend to test with different STOP adjustments. The best risk/reward balance is to adjusted the model to have a stop point at about 60% (which gives me ~40% capital preservation per trade). By doing so, I was able to increase capital per trade to about 13% and still produce a result as good as a non-stop model. I am very excited about this new development because I no longer have to depend solely on the hit ratio and still have a acceptable overall drawdown to about 30% of the total capital (at any given time since Jan-2000 for any given period length).

Now I can go sleep. LOL :p

Thanks again.
 
2007-03-26 Trading Activity :

Testing the model with PUT.
Initiated long position with OEYPI - OEX April 645 PUT @3.80.

Open position : 1
 
JW Trading Journal : 2007-03-28 Result

Closed OEYPI - OEX April 645 PUT @6.50, +71.05%

2007-03 month to date return : 11.23%
2007 year to date return : 15.71%
vs. 2007 year to date SPY (S&P500) return : 0.14%

Open position: 0

First PUT trade was a success. :)
The bid/ask spread for OEX options seemed kind of wide. And I placed a sell market order in at the close which was executed at a price better than bid. Maybe it's normal for OEX options... I'm not sure. Can't say I'm not happy with the execution though.
 

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Excellent JW!
"Now that's what I really wanted to see, you made 3 changes and succeeded."
You developed a put strategy,
you traded a different index that's capable of generating higher profits,
and you held out for those higher profits.

"That's great and it was your very first attempt."

Yes, the OEX spreads are wider, but many times you can open the position or close the position somewhere in the middle between the bid and ask.
At different times of the day, the trading volume picks up on the OEX options and when the volume picks up the bid to ask spread gets smaller (volume is always King).


Jeff
 
Thank you Jeff.

Unfortunately, further analysis from the past few days has came to some undesirable findings.

Whereas the OEX gives me much more upside potential, it's a double edge sword. In order to protect the downside not to exceed the maximum drawdown that I can tolerate, I HAVE TO set stop loss points if I want to use OEX instead of SPY or DIA as the underlying instrument.

This, however, goes against the core idea of the model itself which is aiming at high accuracy of the "outcome" when closing the position. Higher number of positive outcome enables constant compounding. The swing of OEX would stop me out a lot more times than the number of incidents that a non-stop model would have a 100% loss.

Using DIA 121 CALL for example. Current ask is 3.50 and delta is 0.808, which I like. It will expire in 20 days.
The trade from non-stop model would only have a POTENTIAL 100% loss when the Dow suddenly having a total of more than 430 point drop within "1 to 4" trading days AND if not able to recover in the coming 20 days before it expires. Between the day that it cut-through my threshold and day #20 (expiration), I still have the flexibility to close the position out at any recovery after the big drops.

From the cumulative $ return point of view, because the fact that I was stopped out so many times from the OEX model, it wasn't compounding enough times to have the same outcome as the non-stop-non-OEX model. If I tweak it to have a comparable cumulative $ return, then I'll be forced to accept the maximum draw-down of more than 70% of the total capital, which is probably unacceptable to anybody. Why so high of a max drawn down? It is because the total capital is now being divided into fewer trades in order to "make more money back from the bigger winner" when it is proved to be a good trade at the end. For lack of better expression, "you can't eat like a bird and shit like an elephant".

Anyway long story short, when considering my own personal risk-reward on the per trade and cumulative $ return basis, I probably will stick with DIA and SPY options for a while for the original model. But I do feel OEX have its advantages as I was modeling and testing it. It's just that it will need an entirely different game plan than what I have for now.

Thanks for mentioning the OEX idea to me though, I have learn a lot in the process. Besides, I did make that money with OEX Put. LOL!
 
2007-04-03 JW Trading Activity :
Add to long position with SFBDK - SPY April 141 call @3.10.

Open position : 2

damn meeting caused me to miss my trade at the close yesterday... should've got in at 2.70 :(
 
JW Trading Journal : 2007-04-05 Result

Overall a pretty good week. Took profit with half of the position on Thursday and will ride house's money on Monday. Both initial trades should've happened at the market close of the previous day, but the damn meetings caused me to miss my trade. I figure it costs me about 15% ROR... oh well, I'm still an employee and such is the cost of doing business I guess.

Closed half of position: SFBDK - SPY April 141 Call @ 3.80, +38.18%
2007-04 month to date return : 2.99%
2007 year to date return : 19.33%
vs. 2007 year to date SPY (S&P500) return : 1.85%
Open position: 1
 

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JW Trading Journal : 2007-04-09 Result

I closed the remaining long position today with a little more gain. But too bad the market did not move much to the upside. These days I am evaluating the option of starting an incubator fund. If anybody can share their experience and/or opinion on the service provider I'd really appreciate it.

Closed position: SFBDK - SPY April 141 Call @ 3.90, +25.81%
2007-04 month to date return : 4.94%
2007 year to date return : 21.71%
vs. 2007 year to date SPY (S&P500) return : 1.99%

Open position: 0
 

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