Help! How can I outperform a directional view upwards?

Without specifics from OP, I look at entry last Monday at 11AM Eastern (as OP states Monday AM bullish entry) and I chose 1600 Eastern Friday as a close and examine Verticals where one strike is ATM and other is OTM for all possible strikes to observe where the fodder would have splattered. See zipped html scatter plot of what I guessed he/she would have considered. -- perhaps TMI without detailed explanations.
 

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destriero said:
A bull call spread (debit) is the same as a bull put spread (credit). ATM is good. Strike vols will benefit from skew (on index) as the mkt rallies, but strips will fall. If you’re ATM with the bull leg you may win on vol-diff (long leg vol drops less than short leg). Unlikely to matter much. Delta position and gamma should be your primary concern.

The issue with ATM bull spreads over bear spreads is that the call is the revenue side of the risk reversal (ATM bull spreads cost more than bear spreads).

Think of it this way. A symmetric index risk reversal (bull put/bear call/both OTM) is traded as a credit. A symmetric index risk reversal as verticals is traded as a debit (natural cs > natural ps in premium-terms).

Single RR = short put/long call = credit received.
Vert RR = short ps/long cs = debit paid.
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Thnx! May take me some time to process adequately. Am close to agreeing with vol being of secondary importance for SPX.
 
Thank you all so much for your time and considerations! I understand that it might make more sense to come up with some examples and dive deeper in my set of rules.

I am trading the AEX index from The Netherlands. IV is heavily correlated with the S&P 500 VIX, so that is the reason I am using that as an indicator.

I've made a backtest model of the last 30 years to find this indicator, and the 'rules' are as following:

- If monday morning indicator shows upward trend: only step in when VIX < 39. When stepping in, as quickly as possible in the morning.
- If during the week VIX rises at least + 8%: get out of trade
- When I am not trading, I use DITM puts to track the index. Main goal here is to outperform (aren't we all?)

So for example last week, the index opened at the level stated below and the indicators where on green.

28-11 - (AEX) - Open: 716,73
28-11 - (VIX) - Open: 22.09

02-12 - (AEX) - Close: 731,04 - High: 733,99 - Low: 716,55
02-12 - (VIX) - Close: 19.06 (and has not increased +8%)

In my backtest I've added the Black Scholes formula to calculate the option prices with different IV's, Strikes etc. So I'd like to test out different strategies. This week is just an example, but I'm curious what would have been the best strategy (say max leverage 1.4).
 
dennisss11 said:
Thank you all so much for your time and considerations! I understand that it might make more sense to come up with some examples and dive deeper in my set of rules.

I am trading the AEX index from The Netherlands. IV is heavily correlated with the S&P 500 VIX, so that is the reason I am using that as an indicator.

I've made a backtest model of the last 30 years to find this indicator, and the 'rules' are as following:

- If monday morning indicator shows upward trend: only step in when VIX < 39. When stepping in, as quickly as possible in the morning.
- If during the week VIX rises at least + 8%: get out of trade
- When I am not trading, I use DITM puts to track the index. Main goal here is to outperform (aren't we all?)

So for example last week, the index opened at the level stated below and the indicators where on green.

28-11 - (AEX) - Open: 716,73
28-11 - (VIX) - Open: 22.09

02-12 - (AEX) - Close: 731,04 - High: 733,99 - Low: 716,55
02-12 - (VIX) - Close: 19.06 (and has not increased +8%)

In my backtest I've added the Black Scholes formula to calculate the option prices with different IV's, Strikes etc. So I'd like to test out different strategies. This week is just an example, but I'm curious what would have been the best strategy (say max leverage 1.4).
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I am unfamiliar with AEX, but guessing it behaves similar to SPX. IFF you are interested in trading Vertical spreads ..., then that zipped html post earlier shows similar interval on SPX (which moved about the same % as your reference for that time interval) to get feel for best widths for maximizing return on risk capital. The Verticals considered have one leg ATM, and examine all OTM strikes for the other leg. Since this was bullish, the Debit spreads use Calls, which out performed the PUT Credit spreads. -- This is not meant as a recommendation, but just an observation. {The size is adjusted for each to normalize for easy viewing/comparing} BTW: We want a re-match! ;-)
 
dennisss11 said:
Hi all,

Let's say I've found a pattern on a major index, where on Monday morning I know the stock is going to rise during the same week.

This would lead me to utilising a directional option strategy which allows me to profit from this upward trend. However, it would only be worthwhile to me if I can make more money than the actual amount that the index is growing. Now ofcourse I could move forward with buying calls, but then the rise of the index first has to outperform the premium I paid. So it feels better to be selling either puts or calls in some strategy.

A few remarks:
- I use index options, which are European style (so can only be exercised at expiration)
- It would be OK to use some leverage (lets say 1,4 max), but then there has to be some saveguard where I can get out of the positions without to much damage.
- The pattern is dependent on VIX levels for entry and exit - I just need the right strategy for when everything stays as I like during the week.

Can someone help me out, or point me in the right direction?
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Assuming "(lets say 1,4 max)" is 1.4, then Buy 70 delta ITM Call and finance by selling -70 delta ITM Put for leverage of 1.4, but pick an expiration providing you adequate time.
 
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