How do I make the most of this edge?

jtrader33 · Dec 20, 2014

alexkofler said:
CFD gives you 10:1 leverage, most US equities available (1500 with my broker). To open an account you must be non US or find a broker who accepts US clients or do some half-legal workaround on the US-restriction.
I recommend Interactive Brokers, but there are also a couple of good (but costlier) european brokers, like IG or ETX.

Do you know of a US citizen who has found a legal workaround to trade CFDs through IB? What's that look like (if you can share)?

alexkofler · Dec 20, 2014

sorry, the only legal workaround that comes to my mind is opening an account through another person (eg a lawyer) or (forming a) company outside the US.
I've heard of a guy who found an UK passport picture on Google and simply photoshopped his name inside. Would not recommend this, though.

galvinlee888 · Dec 21, 2014

Sam Sanders said:
Let's assume I have a profitable long US equities signal that averages 2% profit over a 3-5 day holding period. The standard deviation of the trades is about 6% and tails are relatively thin (rare to see >20% gain or loss). Entry/exits are at market open. I've been profitably trading this system for over a year but was wondering if I can enhance my return with options.

My gut is that such a small edge, while great in equities, would be eaten up by bid/ask spread in options since the opening auction doesn't really apply. Is this a reasonable assumption? If not, how would you trade this?

Would you buy ITM calls, OTM calls, sell put credit spreads? Stock liquidity is all over the place but some have reasonable volume (1MM+ shares/day) and therefore should have a reasonable option market.

alexkofler said:
not sure if you can successfully dupliate an equity strategy on options basis. probably ok for a few days, but if you hold it for two weeks, options premium decay will really eat your profits.
you sound like you just need more leverage. so rather go in that way.

CFD gives you 10:1 leverage, most US equities available (1500 with my broker). To open an account you must be non US or find a broker who accepts US clients or do some half-legal workaround on the US-restriction.
I recommend Interactive Brokers, but there are also a couple of good (but costlier) european brokers, like IG or ETX.

If that's not an option, SSF will do. Available for many US equities, giving you 5:1 leverage

Sam Sanders said:
Let's assume I have a profitable long US equities signal that averages 2% profit over a 3-5 day holding period. The standard deviation of the trades is about 6% and tails are relatively thin (rare to see >20% gain or loss). Entry/exits are at market open. I've been profitably trading this system for over a year but was wondering if I can enhance my return with options.

My gut is that such a small edge, while great in equities, would be eaten up by bid/ask spread in options since the opening auction doesn't really apply. Is this a reasonable assumption? If not, how would you trade this?

Would you buy ITM calls, OTM calls, sell put credit spreads? Stock liquidity is all over the place but some have reasonable volume (1MM+ shares/day) and therefore should have a reasonable option market.

This depend on the equities, if this is a highly liquid options ( such as SPY, QQQ, GE, INTC and etc) with very small slipage, a deep in the money options will be the best, which will give you almost dollar to dollar leverage.

Chuck Krug · Dec 21, 2014

Just trade the stocks. You can leverage 2:1 overnight at every broker.
So a 50k account with 2:1 margin will yield 4k in 3-5 days. Remember that If your drawdowns are ok, that a lot of people would kill for this kind of performance. (Including funds)
In the future you can always look around for more leverage or OPM

newwurldmn · Dec 21, 2014

The details of your strategy will determine if trading options will help or hurt you.

Namely, what is the return distribution of the stocks you are trading (upside vs downside)?
What is the implied vol of the stocks you are trading? Are you trading a basket or are you trading 1 underlying? Is it index or single stock?

2% over a week with a stdev of 6% over a week prob means that you wouldn't make up your theta.

galvinlee888 · Dec 21, 2014

Chuck Krug said:
Just trade the stocks. You can leverage 2:1 overnight at every broker.
So a 50k account with 2:1 margin will yield 4k in 3-5 days. Remember that If your drawdowns are ok, that a lot of people would kill for this kind of performance. (Including funds)
In the future you can always look around for more leverage or OPM

You are right, a 8% return in a month (2% a week) will make this guy much richer than Buffet or anyone else in the world in 20 years time even with a 10K account. I don't see he need any leverage from Options.

alexkofler · Dec 21, 2014

I forgot, there are also a couple of prop firms who accept swing traders (leverage 10:1)

surfer25 · Jan 11, 2015

I think 1245 gave you accurate answers. You will need underlyings with high option volume. I don't think it matters much which strikes you trade. What really matters is the spread, commissions and execution quality. BTW, 2% over a week or less is not a small edge, it is a huge edge. Check Krug's advice is correct except for that a 50K account would yield 2K per trade at 2:1 leverage. This doesn't necessarily translate into 8% a month because you don't say how often the opportunities arise or how much of your account it is prudent to put into each trade.

longthewings · Jan 21, 2015

Sam Sanders said:
Let's assume I have a profitable long US equities signal that averages 2% profit over a 3-5 day holding period. The standard deviation of the trades is about 6% and tails are relatively thin (rare to see >20% gain or loss). Entry/exits are at market open. I've been profitably trading this system for over a year but was wondering if I can enhance my return with options.

My gut is that such a small edge, while great in equities, would be eaten up by bid/ask spread in options since the opening auction doesn't really apply. Is this a reasonable assumption? If not, how would you trade this?

Would you buy ITM calls, OTM calls, sell put credit spreads? Stock liquidity is all over the place but some have reasonable volume (1MM+ shares/day) and therefore should have a reasonable option market.

So.....based on the parameters you described (2% 4-day drift rate and 6% sigma), a sample path of your strategy (assuming the full-account is invested) looks something like this over 1 year....

This is what you describe as a "small edge?"

galvinlee888 · Jan 21, 2015

longthewings said:
So.....based on the parameters you described (2% 4-day drift rate and 6% sigma), a sample path of your strategy (assuming the full-account is invested) looks something like this over 1 year....

View attachment 148491

This is what you describe as a "small edge?"

LOL
To be honest, any strategy with this kind of return will not survive for more than 3 years, the market randomness will get him pretty soon.