Dual System case - options masters, please advise

[Akhaldanos]

Happy Holidays to all! I've seen very experienced traders around here, unlike many other places, and since these two weeks might be not so busy - I'm about to ask for some advice on options, if I may.

Here is my case: recently developed two intraday strategies for NQ/QQQ, decent results, no options, only the underlying. System A for general bull market regime and System B for general bear/directionless/high vol regime, semi-automated. The Switch is a set of conditions that indicate which regime is present, so I daytrade either System A or System B. The problem is the transition from System A to System B is often several days of severe drop in NQ price and losses by System A until The Switch turns to System B - these losses are eventually recouped with time, but I'm looking for ways to mitigate these losses. No such problem when B to A though.

I have only general knowledge in options, never traded them, but figured out that holding some puts from monday to friday every week parallel to trading System A as an insurance against these transitions might be the way to lower the deviation in weekly returns. The assumption is the put option price deteriorates less when the underlying goes up, than gains when the underlying goes down - is that correct and what is the optimal combination of strike price / expiry date for my case or in general (ATM, OTM, FOTM, ITM)? Figured out the expiry date about two months far, to avoid steep time value decay. This transition situation is relatively rare event, so for many weeks I must pay for that insurance premium from the profits of System A. I guess it's a classic hedge stuff, but options seem... well, very optional
All suggestions, discussion and /or resources are greatly appreciated. Thanks.

 

[nooby_mcnoob]

To avoid steep time decay you want large DTE and ITM.

 

[tommcginnis]

The problem is the transition from System A to System B is often several days of severe drop in NQ price and losses by System A until The Switch turns to System B - these losses are eventually recouped with time, but I'm looking for ways to mitigate these losses. No such problem when B to A though.

Grade your System A trades by the length of time held: there is an easy cure waiting for you there.

 

[Baozi]

-Do you have an idea under which conditions your system A starts to degrade? It would make sense not having the protection in place all the time, as it would erode your profits

-you could use a spread to minimize costs and time decay since in any case, this is just a temporary patch until your system B kicks in

 

[Wheezooo]

-Do you have an idea under which conditions your system A starts to degrade? It would make sense not having the protection in place all the time, as it would erode your profits

No + too bad - removing risk comes at a cost.

-you could use a spread to minimize costs and time decay since in any case, this is just a temporary patch until your system B kicks in

Yes

To quote from my own post three days ago.

...scenario test the living shit out of your position... What if...what if...what if... And that means... adding fictitious trades to see what if.. what if...what if... <I'll now add...know your surface, then work backwards to fill in the holes>

I'd use more word things, but busy-busy... guess this is what happens the last week of Deece, when you marry a shiksa.

Happy Holidays!

 

[Akhaldanos]

-Do you have an idea under which conditions your system A starts to degrade? It would make sense not having the protection in place all the time, as it would erode your profits

Good points, thanks. No, it is impossible to foretell when a "black swan" event will strike. Tweaking System A itself to provide for such an event degrades its overall performance. Your next suggestion - using low cost spreads seems very viable. I'm just starting getting better grip on spreads and other OSs.
Lowering the StDev of returns (by trimming both the upside & the downside) MORE than reducing Avg return is also an improvement...

 

[Akhaldanos]

No + too bad - removing risk comes at a cost.



Yes

To quote from my own post three days ago.

...scenario test the living shit out of your position... What if...what if...what if... And that means... adding fictitious trades to see what if.. what if...what if... <I'll now add...know your surface, then work backwards to fill in the holes>

I'd use more word things, but busy-busy... guess this is what happens the last week of Deece, when you marry a shiksa.

Happy Holidays!

I see what you mean. It's getting more and more math-intense though. For example, finding the sweet spot of % allocation of equity to the insurance play... also, got some difficulties tracking the past performance of some options strategies... busy weeks ahead

How about buying VIX Calls? Anyone using them?

Thank you guys, very helpful posts...

 

[Cabin111]

Are you concerned about holding your positions over night?? Bad news or a major correction for a day could be a problem. You try and close your positions, you (and 98% of other small investors) go to the back of the line. Eyes wide open...

08/05/11

Last Thursday, the Dow Jones Industrial average fell 513 points, or 4.3 percent, making it the worst single-day drop since the depths of the financial crisis. That is, until the following Monday.

On the first day of trading the since Standard and Poor’s downgraded U.S. credit to AA-plus from AAA, the Dow Jones dropped by 630 points, or 5.5 percent, according to Google Finance, marking the sixth-worst single-day point drop in the history of the Dow. Now, with two of the ten worst day in history of the Dow Jones occurring within a week of one another, murmurs of the U.S. dipping back into recession are picking up steam.

Still, despite the severity of drops, neither were high enough to become the top drop ever. That title goes to September 29, 2008, when the Dow Jones fell a total of 778 points, or 7 percent, during the depths of the financial crisis. And in terms of percentage decline, the U.S. stock market is nowhere close to its darkest day on Wall Street. On October 19, 1987, for example, the Dow sank an entire 22.6 percent, despite falling by less than Thursday’s point total, because it represented a larger portion of the index’s total points at the time.

 

[Akhaldanos]

Are you concerned about holding your positions over night?? Bad news or a major correction for a day could be a problem. You try and close your positions, you (and 98% of other small investors) go to the back of the line. Eyes wide open...

08/05/11

Last Thursday, the Dow Jones Industrial average fell 513 points, or 4.3 percent, making it the worst single-day drop since the depths of the financial crisis. That is, until the following Monday.

On the first day of trading the since Standard and Poor’s downgraded U.S. credit to AA-plus from AAA, the Dow Jones dropped by 630 points, or 5.5 percent, according to Google Finance, marking the sixth-worst single-day point drop in the history of the Dow. Now, with two of the ten worst day in history of the Dow Jones occurring within a week of one another, murmurs of the U.S. dipping back into recession are picking up steam.

Still, despite the severity of drops, neither were high enough to become the top drop ever. That title goes to September 29, 2008, when the Dow Jones fell a total of 778 points, or 7 percent, during the depths of the financial crisis. And in terms of percentage decline, the U.S. stock market is nowhere close to its darkest day on Wall Street. On October 19, 1987, for example, the Dow sank an entire 22.6 percent, despite falling by less than Thursday’s point total, because it represented a larger portion of the index’s total points at the time.

Yes, the hedging positions (VIX or some OS) are to be held anywhere from 1 week to one month, until my filter turns RED and switch to System B. By that time the vol is always high enough and System B trades very profitably in both directions. Both Sys A & B are strictly regular session only, no overnights. System A is designed for low vol bull market regimes and gives me trouble when these come to an end.