Purely Mechanical Option Trading

Quote from rickty:

Is there any reason you would not use your systems on options on the ES (the SP500 mini futures)? (You could get greater leverage).

Richard
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I guess its possible that it could work with options on the ES,
they are so new I never thought about it.
Its kinda like when I was using OEX options for years and all the sudden SPY options came along. I never really thought about using them until market volatility exploded mid-year in 2007 and OEX options became nearly impossible to use a modest stop. (necessity became the mother of invention)
 
Quote from austinp:

OEX and SPX options seemed to plummet in popularity when QQQ options were rising and also the surge in eminis back in early 2000 ~ 2002. SPY options were another huge boon to retail traders, sucked the life out of big index options and their wide spreads.

Have you tested your systems on QQQQ options? I would imagine you have, just curious about results.

SPY and Q options are both excellent trading vehicles for the reasons you noted. It looks like you should expect to enjoy same relative success going forward as you have in the recent past. [/B]
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I have tested this system with QQQQ options.
It doesn't work as well.
The ability to create a 25% to 30% profit "regularly" is simply not there.
The same size market move that creates a 30% profit for SPY options only creates about a 10% (roughly) profit for QQQQ options.
The SPY to SPX multiplier is 10 to 1,
The QQQQ to NDX multiplier is 40 to 1,
so it totally makes sense why the large difference in profit potential.
 
Quote from jeffalvinson:

The ^Triad^ is comprised of 3 types of mathematical logic:
1: Simple Trending Logic.
2: Intuitive Logic.
3: Market Monitor Logic. [/B]
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Jeff
If part of the process is "intuitive logic" how can you state that it is a mechanical system?
 
Quote from onthemoney3:

Jeff
If part of the process is "intuitive logic" how can you state that it is a mechanical system?
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Intuitive logic is a formula for reversals or confirmation built
into a program. Its not "me" being intuitive, its out of my control.
Its the program being intuitive based on the formula programmed into it,
and the intuitive program doesn't have the final word.
It simply outputs its result.
The trending program outputs its result.
The Market Monitor program makes the final decision by comparing the trending and intuitive program's outputs with its
own output.
At this point I have nothing to do with the final trade decision.
Its up to the final decision maker (Market Monitor Program).
I simply enter the trade with semi-automated orders and go
fishing....or to the movies....or clean the grease off the driveway.

"Its the machines I tell you, they are taking over."
 
Not trying to be rude here but there are HUGE flaws in just what you’re posting here.

Here you say...

“Each evening I record the open, high, low and close of specific SPY call and put options.
I then plug this data into a 3 completely different computer programs.
The Trending program is a math formula than looks for numeric
trend changes (or trend continuous) in the data. It simply outputs there is a call trend, or a put trend.”


All options puts and calls are derivative products. There for the price of the put or the call is based on something else. In this case it’s the variables in the basic options equations. There is no trend in either one, in fact you can calculate the exact value of the call or the put for any given price in the underlying given a set of data. Options values don’t run in “trends” the underlying does.

Then you go on to say....

“The Intuitive program is a formula looking for numeric "changes" in the data sums with respect to decades of historic comparitors
with the ultimate intent of outputting a reversal, or confirming the current trend.”

Again we fall back on the FACT that options don’t have trends their price is based on the underlying and a handful of other variables. By the way if you had a data base going back to the beginning of options it would be billions of bites of info and take days to run through, but that’s a whole different story.


Then you go on to say...

“The Market Monitor program is a formula looking at the overall "Big Picture" of the data. It compares short term (3 day) trend changes in the data sums with long term (9 day) trend changes in the data sums. It then confirms either the Trending program's output or the Intuitive's program's output, or it confirms both for bi-directional trades, or it blocks both.”

Again we keep running into the fact that options are derivative products and therefore they are priced off something else in this case the underlying and thus cant and don’t have a trend of their own.


There are some other serious flaws in what you post.

You post... “I buys calls or puts (or both) using SPY options.” Both would result in one being a loser canceling the other. You also use the term “bidirectional trade” again that’s counter intuitive and one leg of that trade is a loser.

On page one of this thread you say your programs are derived by constant refining of “systems” you bought. Then on page two some how you now paid a system’s architect to create the programs. What off the shelf system has open source code and architecture? What kind of programmer / architect would work so many years and have to write what would be millions and millions of line of code with no payment?

There are huge mistakes in the rest of your posts too and these are SERIOUS options mistakes. Basic stuff that someone who developed options systems and traded for 10 years would know.

You go on to compare the SPY to the OEX ... They’re options on two totally different underlyings and so comparing there spreads and the value of the at the money is like saying that you like apples better then watermelons because they are easy to carry around.

You go on to post this classic...

“SPY options move in a linear fashion with respect to the S&P500. Roughly every favorable 5 point move in the SPX creates a 10%”

I hate to be the bearer of bad news but until an options delta reaches 1.00 the prices are NON LINEAR in all options on any underlying. Rather then use the term “roughly” which essentially is meaningless filler with out a qualifier lets use the term “delta”. Lets also say they all options change in price according to their delta and the change in value of the underlying. Now there are other factors such and time and volatility etc. etc. But we’ll leave them out for the sake of keeping it simple. Again NO option which is not 1.00 delta moves in a linear fashion. The at the money or slightly out of the money you claim to use are nowhere near 1.00 delta.

ES options been around a long time they’re not that new. The SPY options been around nearly a decade if I recall correctly too. That basiclly encompasses you’re entire story.

Here is some more good ones.. you post this ..

“The same size market move that creates a 30% profit for SPY options only creates about a 10% (roughly) profit for QQQQ options.”

The same size market move in any underlying will move the at the money fairly close to the same amount on both underlyings. If you have a 10% move in the underlying the at the money or .50 delta option will move .50 cents times the 10% move no matter what the underlying is. The only difference in how many contracts you can afford the % gain wont change.
 
You also seem to be implying that the “intuitive program” has a basis for decision making since you say it’s the program being intuitive. Are you saying that you’ve built a program with artificial intelligence in trading which learns from all the new data each day? Come on fess up you have to work for someone like NASA or the super secret think tank deep inside the CIA right?

In your earlier post you say the Intuitive program compares the date to decades of data, then later you say it’s a formula that has its own intuition programmed into it. Come on buddy I am trying to keep it real here but you can’t even keep your posts consistent.

Sorry if I got a bit rude but your posts are so far from reality in the market place and in the pricing of options its borderline sillyness.


I suggest you read a good options pricing book so you can learn just how options move with respect to the underlying. I also suggest a good math text so you can learn %’s.

Maybe one on the various products in the market place and how their values are derived.
 
<i>"Again we keep running into the fact that options are derivative products and therefore they are priced off something else in this case the underlying and thus cant and don’t have a trend of their own."</i>

Simply stated, index option underlying values are the futures market, not the cash market. They are an extrinsic premium-value instrument just like futures, therefore that's why both track together. If that weren't true, arbing options and futures for extrinsic decay would be free money at end of each month if it weren't for daily arb adjustments.

Theta value in options and futures are par into expiry events, monthly and quarterly.

SPY and QQQQ options move in linear value fashion with S&P 500 and Nasdaq 100. The values cannot differ greatly by percentages... again it would create free money opportunity if not arbed constantly to preserve parity.

Theta (time) and Gamma (think speed over distance from out-of-money to in-the-money ratios) are how option values are expressed. They are very parallel to futures for those reasons. Same general game, different derivatives.
 
Austin I understand that the underlying price of index options is really the futures not the cash.

The point is that the futures essentially have a delta of 1.00 and therefore do move one for one with the cash otherwise as you stated there would be a simple ( well not that simple with 500 stocks in the case of the SPX vs the various SnP futures) arb. The futures simply have the time value out to settlement priced into them.

On the other hand options prices fall on a bell shaped curve ( without volatility skew which we’ll leave out for the sake of simplicity) There values can and do differ greatly by %. The easiest example would be out the out of the money option on expiration day. Even on an up day in the market the calls which are out of the money but near enough to have some premium will fall in value. There are also many days which are not expiration related where the out of the money call in the SPX will fall even when the index ( also future ) is up on the day. The heavy volatility skew in the SPX ( and options on the SnP futures) is the mitigating factor.

Also as you point out the gamma, change in delta over change in price of the underling, is a glaring example of why options prices are nonlinear until their delta reaches 1.00 and therefore their gamma reaches 0.
 
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