best option strategy for my quant stock trading system?

A

artem65

hello,

actually I am a stock trader and have no experience with options.

I trade and backtested a system with about the following results in the last 18 years

winning rate (without transction fees): 75%
avg win/avg loss: 1.25
avg gain: 10%
avg loss 8%
avg holding period: 7 days

i simply buy stocks that trigger a signal and sell them when an exit signal appears. because there are sometimes a lot of signals at the same time, i can not buy them all because i buy the stocks without leverage. i thought about using options since the risk is limited and only a small portion of my account is then tied up per position.

my system is a pullback system as taught on tradingmarkets.com

it buys stocks that fell sharply in a short period of time. thus it has a high volatility.

my question is:

what do you think is the best option strategy i can use for my strategy? again, it buys high volatile, sharply fallen stocks and has usually bug moves up in about 7 days.

i think one or two strikes in the money calls are the best choice but I am no "options guy". it would be great if someone is willing to help me.

best wishes

artem
 
Quote from artem65:


i think one or two strikes in the money calls are the best choice but I am no "options guy". it would be great if someone is willing to help me.

best wishes

artem [/B]
More...

My humble 2 cents:
I agree with buying the options ITM with as little time premium
as possible on the options, even you have to go deep ITM to get that.
The reason is:
You just admitted the stocks are blown up with volatility due to the sudden drop in stock price.
That means when the stock starts to go back up the volatility will
collapse.
If you buy options with lots of time premium in the price, the
time premium will evaporate as the stock is rising but the option
price won't move up much until the time premium is sucked out of the option.
Look for option Delta .90 or > (gain with respect to a 1 point move in the stock).

Jeff
 
Quote from jeffalvinson:

My humble 2 cents:
I agree with buying the options ITM with as little time premium
as possible on the options, even you have to go deep ITM to get that.
The reason is:
You just admitted the stocks are blown up with volatility due to the sudden drop in stock price.
That means when the stock starts to go back up the volatility will
collapse.
If you buy options with lots of time premium in the price, the
time premium will evaporate as the stock is rising but the option
price won't move up much until the time premium is sucked out of the option.
Look for option Delta .90 or > (gain with respect to a 1 point move in the stock).

Jeff
More...

One other important point I should mention:
"Just because your suddenly trading options, don't allow that fact
to alter your normal stock trading method one bit!"
In other words, when you would have normally bought the stock,
then buy the options.
When you would have normally sold the stock, sell the options.
Don't get creative and think: "Wow! I an trading options now, lets shoot for the moon." Wrong! this rarely ever works.
You sound like you have trade parameters (entry price, sell limit, stop) for your stocks. Use those same stock trade parameters to enter, sell or stop your options.
Test it on paper first for a while.


Jeff
 
One problem I see with DITM option trading is that you might not get the liquidity you need to get in/out of the position at a reasonable cost. Generally, option liquidity is in the ATM/OTM strikes.
 
My advice, find a way to get the appropriate leverage you need to do it in the underlying rather than the options. The spreads on the options are going to be a huge deal breaker.

Also, if you haven't already, make sure that your universe includes delisted stocks. If not, your backtest results won't have included buying Enron, Lehman, Bear Stearns, etc. on their way to zero.
 
Quote from 2rosy:

backspread... buy 1, sell 2
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Wouldn't that get you split down the middle by an Enron/Lehman, etc?

I would think you'd want buy 2, sell one ratio backspread:
1) Can use ATM/OTM so you get better spreads.
2) You don't eliminate volatility/theta exposure, but you might be able to reduce your risk as opposed to outright long positions.
3) Depending on your strikes, it can be done for lower cost than an outright long, possibly even for a credit in the event it keeps on going.

If you get the big move as expected, you'll quickly be long the equivalent number of calls. Downside is that your breakeven will be higher, than straight long.

1:2 or 2:3 ratios might be worth a look, depending on which stocks you are playing. Obviously commission costs are higher and you'll eat the spreads more often, but you can't have everything...
 
Exactly what I was thinking re: spread. Using stops on options is also a problem, especially if the spreads are wide. Commission, spreads, and stops could easily turn a winning stock system into a losing option system.

Quote from Traveler:

My advice, find a way to get the appropriate leverage you need to do it in the underlying rather than the options. The spreads on the options are going to be a huge deal breaker.

Also, if you haven't already, make sure that your universe includes delisted stocks. If not, your backtest results won't have included buying Enron, Lehman, Bear Stearns, etc. on their way to zero.
More...
 
The answer to this is:
buy calls on low volatility stocks that have slowly corrected.
Look at the attached chart of INTC that I pointed out yesterday
to another member.
Great company, everyone uses its products, big correction.
INTC open today at 19.90
The INTC JAN 17.5 Calls opened at 2.58
That's 2.40 ITM of intrinsic value or 93% ITM.
That's a Delta of .86 (close enough to 90).
If the stock moves 10% (like the Op's profit goal),
in 15 days (Op said 7 days average but INTC moves slow) then the INTC Jan 17.5 calls worth 4.40 ( +70%).
If it takes 30 days to move up 10% the
INTC Jan 17.5 calls worth 4.39 ( +69%).
If INTC drops -8% (Op's Stop Level) in 15 days the
INTC Jan 17.5 calls are worth 1.26 (-51%).
If it drops -8% in 30 days the
INTC Jan 17.5 calls are worth 1.09 ( -58%).

Honestly here an -8% stock drop is to large in my opinion.
-5% is more reasonably and a -5% drop in INTC stock in 15-30
days would place the value of the INTC Jan 17.5 calls options at
1.70 (-34%) in 15 days and 1.56 (-40%) in 30 days. Much better.

Jeff
 

Attachments

I want to trade the strategy only on all stocks of the S&P 500 and the nasdaq100.

Is liquidity a big problem there when i am trading an account of 50,000-10,000$ and buy calls for about 1-2% of the total account (thus 1,000-2,000$)?

as i mentioned i never traded options but it would suprise me if the liquidity is low in the 600 biggest US stocks in one to two strikes in the money. please post your opinion.
 
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