How Much Can You Improve A Strategy's Returns With Adjustments?

T

tommo

Anyone that has done much backtesting will know it is extremely hard to find a strategy that outperforms just buy and hold. Markets are on the whole are reasonably priced with the caveat generally IV slightly overpriced (historically) but even then for the most part you're not going to make much more than just buying SPX and holding.

But a lot of backtests (at least those that im capable of running) are things like "what would happen if i just sold 15 delta put spreads every week for 10 years". Not very sophisticated. But can we improve returns much by adjusting? So for example when a 15 delta becomes a 40 delta rollout out and down if you can for a credit etc. In theory you're then getting 2 bites of the apple to be right and should decrease the amount of losses.

With put spreads for example just eliminating 2 losses out of 100 trades can drastically improve returns as the risk:reward ratio is so bad on them.

But this is all hypothetical to me at the moment as i'm relatively new to the options side of things. Do any traders that have been in the market for a long time have a view on this?
 
tommo said:
Anyone that has done much backtesting will know it is extremely hard to find a strategy that outperforms just buy and hold. Markets are on the whole are reasonably priced with the caveat generally IV slightly overpriced (historically) but even then for the most part you're not going to make much more than just buying SPX and holding.

But a lot of backtests (at least those that im capable of running) are things like "what would happen if i just sold 15 delta put spreads every week for 10 years". Not very sophisticated. But can we improve returns much by adjusting? So for example when a 15 delta becomes a 40 delta rollout out and down if you can for a credit etc. In theory you're then getting 2 bites of the apple to be right and should decrease the amount of losses.

With put spreads for example just eliminating 2 losses out of 100 trades can drastically improve returns as the risk:reward ratio is so bad on them.

But this is all hypothetical to me at the moment as i'm relatively new to the options side of things. Do any traders that have been in the market for a long time have a view on this?
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Why does everyone want to trade sentiment (i.e. volatility)?

What happened to just buying stuff that is undervalued and selling at a premium?

The most profitable sides of finance are the most boring I am afraid...
 
tonyf said:
Why does everyone want to trade sentiment (i.e. volatility)?

What happened to stuff that is undervalued and sell at a premium?
More...

Depends what you mean. If you mean an option being underpriced relative to your options pricing model i'm guessing that game pretty much sewn up by the market makers. Those misspricings must be very fleeting.

If you are talking about stock picking, well that's a whole other game and not purely related to options. But if youre referring to something else i'm all ears.
 
tommo said:
Depends what you mean. If you mean an option being underpriced relative to your options pricing model i'm guessing that game pretty much sewn up by the market makers. Those misspricings must be very fleeting.

If you are talking about stock picking, well that's a whole other game and not purely related to options. But if youre referring to something else i'm all ears.
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Is there any reason why you want to trade options in particular as an asset class?

Edit: I would start with equities if I were you.
 
tonyf said:
Is there any reason why you want to trade options in particular as an asset class?
More...

A few reasons, ive been futures trading professionally for about 15 years and always drawn more to the intellectual styles of trading rather than seat of the pants stuff. Looking for miss-pricings, unique correlations to build spreads from. Often the overall market direction or even what i was trading was of zero interest to me. It was all juggling numbers and often building almost risk free trading opportunities. Did that for years at prop firms with other guys all doing the same. But that game is just so exploited now, struggling to still have an edge.

Then I started branching out into options and the amount of versatility in there to adjust, hedge, spread and be directionally neutral was right up my street.
 
tommo said:
A few reasons, ive been futures trading professionally for about 15 years and always drawn more to the intellectual styles of trading rather than seat of the pants stuff. Looking for miss-pricings, unique correlations to build spreads from. Often the overall market direction or even what i was trading was of zero interest to me. It was all juggling numbers and often building almost risk free trading opportunities. Did that for years at prop firms with other guys all doing the same. But that game is just so exploited now, struggling to still have an edge.

Then I started branching out into options and the amount of versatility in there to adjust, hedge, spread and be directionally neutral was right up my street.
More...

Very interesting. How did the prop shop boys manage to build risk free trading models with futures?

That's a terrific starting bloc...
 
tonyf said:
Very interesting. How did the prop shop boys manage to build risk free trading models with futures?

That's a terrific starting bloc...
More...

The best edge I ever had was when a lot of commodity spread contracts werent implied from the outrights. So the Jun Dec calendar could be priced at 50. But if i bought the Jun outright and sold the Dec outright i could do that for a price of 45. So was instantly 5 ticks onside if i just hit the 50 bid on the calendar ladder or just use the 5 ticks as a buffer and run the trade and worst case scenario I could get out for a scratch guaranteed.

Then there were other correlations/spreads that would just trade in a 100 tick range for years on end. Just bought the low in the morning, sold the high in the evening, take your 100 ticks for the day and go home.

I'm sure some edges like that exist somewhere but i don't have any anymore.
 
There are at least 3 experienced vol traders here who may be able to advise/help in that case: destiro, taowave and newwurldmn.
 
You can simplify this thinking by treating each trade by itself. 1st trade is a loss. Your adjustment is another trade by itself. If it has -ve expectancy it won't help.
 
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