Jeff Augen's StdDev Price Change

"am i going to use 10 day returns or stdev of 1 day returns rescaled by the root of time.". i don't know the difference .. whats the difference. [/B]
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Let's say you want to calculate (estimate) the stdev of returns (or vol) over 10 days, name it vol10. You know the vol for each day, say Day1 - s1, Day2 - s2 and so on to Day10 with vol s10.
You cannot add vols but you can add variances i.e. the square of vol
vol10= SQRT(Var10) = SQRT(s1^2+s2^2+...+s10^2)

Another way to do it is to take a daily vol value, say the most recent one Day1 -> s1 and "convert" it form daily to 10-day value.
vol10=SQRT(Var10)=SQRT(10*s1^2) which is SQRT(10)*s1

A more familiar example is when you convert daily vol to annual vol. You multiply with SQRT(252)~16 assuming 1 year has 252 wdays
 
Augen is a genius, and I am surprised that with all of the mathematical knowledge demonstrated here, that it is not readily apparent. There is no need to make it too complex; he is simply expressing how to isolate conditions when the market is stretched liked a rubberband so that you can position yourself to be in an advantageous position when it returns to a more normal state. His techniques are not meant to be stand-alone, and will greatly supplement other successful techniques. I have no intent to debate this, only to say that I use similiar methodoligies to produce consistent profit and so I recognize their real world application.

Thanks.
 
I am sure he is a bright guy (just like Taleb is), but it does not mean he knows what he's talking about. Not sure which book you mean, but the one that I have seen is
(a) peddling stuff that is dated and border-line useless
(b) does it in a manner that is fuzzy and non-mathematical
(c) has a lot of hind-sight trading to make it look attractive
 
[inuote from sle:[/i]

Not sure which book you mean, but the one that I have seen is
(a) peddling stuff that is dated and border-line useless
(b) does it in a manner that is fuzzy and non-mathematical
(c) has a lot of hind-sight trading to make it look attractive
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+1. augen kinda sucks...



One of his books he talks about buy overwrites going into OPEx... holding Thursday night selling Friday morning... yea.. go ahead try that and get back to me
 
DBH21, can you provide some more details on what you are looking to do? You mentioned back testing iron condors in an earlier post - are you looking for a quantitative way to select, enter, manage or exit these trades?

It may be easier to first determine what problem you are trying to solve and then select an indicator or protocol to help you (as opposed to looking for a way to apply an indicator).
 
Good question.

I am trying to determine safe(ish) ranges to enter into condors. Specifically, if I think a trade that is 12% OTM with a Delta of 8 is safe to enter 4 weeks away from expiration.... I was hoping to use the price spikes to help determine a comfortable OTM distance if we are 2 or 3 weeks away from expiration.

I can generate the price spikes for any underlying now, but I am trying to figure out still how to take advantage of it. I can count the number of spikes over |2.0| for instance (2 std devs), and maybe I like trades that only have 1 of these spikes within the last X days?
 
Thanks for the context.

When deciding whether to sell an iron condor, there are a wide range of possible factors that traders assess. Looking at the deltas of your short strikes are certainly important, as those serve as proxies for probabilities at the time you put the trade on.

There are two main schools of thought re. deltas: many newsletters suggest low delta sales because the win rate is high. The downside is that a bad month can wipe out a year's worth of gains.

For those who feel that the risk/reward ratio of low delta sales is a tragedy waiting to happen tend to sell iron condors with short strike deltas closer to 20. These trades require more frequent adjustments but provide much higher credits.

I'd also suggest looking at support/resistance in the underlying - this will help you define the range and where the asset currently is in that range (similar to what you are using Augen's indicator to measure).

Another key metric is open interest. Large open interest indicates institutional positions and they, more than retail traders, move the markets.

Beyond strike selection, implied volatility relative to historical volatility is a key metric to consider when opening an iron condor position. Keep in mind that iron condors are short vega and a spike in implied volatility, especially as you near expiration, can cause significant problems.

Theta is also something for you to consider. As many options traders know, theta decay is exponential. While theta decay for ATM options is most dramatic in the final 30 days of the contract, OTM decay is most pronounced in the 60-30 days before expiration. This difference allows traders to realize most of their credit without holding the positions through expiration.

Lastly, keep in mind your commissions. Selling a $50 iron condor and paying $10 in commissions puts you 20% down every time you open a trade. High commissions frequently cause traders to hold positions too long in an effort to squeeze every last cent out of their trade which puts you at significant gamma risk.

Hope this helps. There are many ways to successfully trade iron condors but, like most things in life, there are trade-offs.
 
Thanks for the thoughtful reply. I have a scanner that looks for particular trades that include deltas, time to expiration, earnings, volume and open interest, OTM of short strikes, net premium, and a few other items. I often manually look at support and resistance lines as well but I am still somewhat skeptical.

I'm looking to improve the scanner so that it is able to find more trades. As the window to expiration narrows, I can choose to take less premium (which I'm not terribly interested in) or look for trades that are less volatile and less OTM but still safe enough. That is what I was hoping to get out of Augen's statistic.

On another note, I wrote a backtesting tool for testing close to the money ICs on the RUT. With 9 years worth of data. I've so far analyzed basic scenarios such as adding stop losses, profit targes, minimum premiums, different expiration cycles, and managing a losing trade by scaling down the position. It is interesting to note, that there are a few scenarios that seem to outperform (having an acceptable minimum premium is the greatest success factor), but it is actually very hard to beat simply holding to expiration (which is my baseline test). I've run probably 500k different permutations, and holding to expiration beats the vast majority.

But having high min premiums, and larger stop losses help. Lots more testing to do though.
 
Sounds like you're definitely doing your homework. It's reassuring to learn that your backtesting confirms what many Iron Condor traders have discovered through trial and error - initial premium is a primary success factor.

I have heard of iron condor traders who take a more mechanical approach to their trading and hold all of their postions through expiration and don't make any adjustments. Michael Benklifa briefly describes this strategy in his "Profiting with Iron Condor Options" book.

You may want to look at indicators like ROC (rate of change) or ATR (average trading range) to determine whether the underlying is range bound or trending. I often look at the ATR relative to its 5 day MA to find "safer" iron condor candidates.
 
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