Purely Mechanical Option Trading

Quote from jeffalvinson:

Not exactly. I can see you need more details to understand.
Let me take another shot at this (without totally giving away the farm):

Lets take two options on the same index, a call and a put that closed approximately in the 2.00 to 3.00 range.
1: The relationship between the "open" and "high" of a call option is different (bigger or smaller) than the relationship between the open and high of the put option on the same day.
2: The relationship between the "low" and "close" of that same call option is different (bigger or smaller) than the relationship between the low and close of that same put option on the same day.
3: The relationship between the prior close to the current close
on the same call option is different (bigger or smaller) than the relationship between the prior close to the current close on the same put option on the same day.

The "relationship" of Numbers 1 thru 3 above are identifiable trends. Up, Down or Neutral.
Lets add 3 days of these trends together for the call trend and 3 days of these trends together for the put trend and we call this the short term trend.
Now lets add 9 days of these trends together for the call trend and 9 days of these trends together for the put trend and we call this the long term trend (with respect to trading time frames).
Now lets introduce these short and long term call and put trends into programmed formula's that can recognize when a certain calls trend (short and long) and a certain put trend (short and long) taken within the same 3 and 9 day periods of time,
have certain identifiable characteristics that match decades of same data characteristcs and react reliably in a certain direction:
Up, down, or neutral (Call, Put or no trade). Programmed algorithms were a part of the equation.

Hoped that helped a little.
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Thanks I am not looking for help.

The problem is you lack a basic understanding of how options are prices, why and how they move and market mechanics of options.

Options are priced based on 5 variables:

1) put or call
2) days till expiration
3) implied volatility
4) the risk free interest rate
5) the price of the underlying

None of those variables are the open, close or range of the previous day or any day in the near or distant past.

In particular the 9 days previous have NO bearing on the price of tomorrow. There are days when the index will be up and the calls will be down. There is also a clearly calculable relationship between the call and put. Call / Put parity keeps those options in line with each other, since to the professionals in the market calls and puts are exactly the same thing, particularly in index options.

Options are a derivative product, that means their price is determined from something else. In this case it’s the variables I listed not the previous days prices.

They do as you say “have certain identifiable characteristic”, but unlike your incorrect definition those characteristics are not based on previous history of themselves.

In the interest of civility I had not addressed your story of woe about your health. Although I am sorry to hear of your misfortune, I concur with Reaver whole heartedly that trading might not be the appropriate choice for your health.

On the other hand I have been civil with you, yet you attacked my knowledge of options when its clear you don’t have even a cursory knowledge of how and why options are priced and move.
 
Quote from Reaver:

Not trying to be OT, but what would draw you to trading if you already had major health problems involving arrhythmia and high blood pressure? In all seriousness.
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Due to physical disability, I no longer could go outside my home for work. I needed to find a way to earn income from home.
I always really enjoyed long term investing in the stock market, so I decided to give short term income trading a shot.
I didn't start out with high blood pressure and heart arrhythmia, that wasn't my disability. It was a "side effect" from taking Vioxx for a couple of years for my disability.
 
Quote from dipper17:

Thanks I am not looking for help.

The problem is you lack a basic understanding of how options are prices, why and how they move and market mechanics of options.

Options are priced based on 5 variables:

1) put or call
2) days till expiration
3) implied volatility
4) the risk free interest rate
5) the price of the underlying

None of those variables are the open, close or range of the previous day or any day in the near or distant past.

In particular the 9 days previous have NO bearing on the price of tomorrow. There are days when the index will be up and the calls will be down. There is also a clearly calculable relationship between the call and put. Call / Put parity keeps those options in line with each other, since to the professionals in the market calls and puts are exactly the same thing, particularly in index options.

Options are a derivative product, that means their price is determined from something else. In this case it’s the variables I listed not the previous days prices.

They do as you say “have certain identifiable characteristic”, but unlike your incorrect definition those characteristics are not based on previous history of themselves.

In the interest of civility I had not addressed your story of woe about your health. Although I am sorry to hear of your misfortune, I concur with Reaver whole heartedly that trading might not be the appropriate choice for your health.

On the other hand I have been civil with you, yet you attacked my knowledge of options when its clear you don’t have even a cursory knowledge of how and why options are priced and move.
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When I read the stuff you write, my blood pressure goes up and my heart starts pounding.
I can see that I am going to have to put you on ignore so I can't see your insulting posts.

Also, since I don't understand how options work, I guess I should write I.B. a check and return the money I earned
from my lack of knowledge.

Seriously though (to anyone else reading this),
if a trading system can predict short term market direction and you are trading directionally, you don't have to know the option greeks to make money. You can actually throw a dart at an option chain (on the side of the option chain that represents
the direction your system is indicating) and make money.
My system said last night (look at the post from last night,
page 8, my reply to kinggyppo) the short term put trend is declining, don't buy puts.
What's the market doing today?
 
Well you have my condolences if you let people who correct your facts upset you to the point where it raises your blood pressure. Having had a lot of experience with vioxx and knowing it has been off the market for several years now the effects from it should be long gone from your body.


As far as returning money to IB, well that’s just getting even more ridiculous. This is the internet and you posting that you made money and making up a spread sheet that says that is not the same as actually making the money.

As far as insults go: yes I gave you a touch of friendly ribbing with the NASA joke. You were the one that dismissed my knowledge with rude comments without even knowing my background.

As far as the Greeks go, nowhere did I mention you need to have mastered them to use options to simply leverage your directional guesses in the market place via buying options. Then again history has proven time and again that buying options to leverage one’s directional speculations in the market is a big time losing game. It’s also compounded when you don’t know why or how an option gets its price or why and how that price changes.

Also as far as today’s action goes, are you saying that your system predicted that the data which came out this morning and flipped the pre market futures from negative to positive so we could have this meager up opening was predicted by your system?

Again for those following this discussion:

Options values have nothing to do with their previous prices. Their value is determined solely by the variables which I listed in my last post.
 
I think it is an interesting idea, none the less. if options data could be used to predict the next day's move with a historical level of accuracy, I would use futures.
 
Pre,

Of course, thats basically what I am saying. Since the options price is not independent and its value comes from the underlyings value in addition to other factors, then its that underlying which you need to use as the basis for any system. This is not a new concept.
 
Quote from dipper17:


Also as far as today’s action goes, are you saying that your system predicted that the data which came out this morning and flipped the pre market futures from negative to positive so we could have this meager up opening was predicted by your system?


Yes. The Market Monitor program controls the final decision
on the trade direction: Call, Put, No Trade (specifically with the exact option, entry and exit).
Last night it said:
Block All Put Trades.
Put Trend is in a Decline...44...14...2 (daily put signal strength),
No Signal.

However, it couldn't recommend calls because there isn't any short term call uptrend as of yet.
Final Decision: No Trend=No Trade.
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You're sure you want to say that your system predicted that the economic data which came out this morning and flipped the futures from a negative opening to a slight positive opening even now that the markets down purely based on the last 20 years of date on options open, close and range?
 
Quote from dipper17:

You're sure you want to say that your system predicted that the economic data which came out this morning and flipped the futures from a negative opening to a slight positive opening even now that the markets down purely based on the last 20 years of date on options open, close and range?
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The system is simply saying:
There is NO short term put trend=Don't trade puts.
There is NO short term call trend=Don't trade calls.

It only outputs trades when there is a 67% to 90% probability of
a +25% to +30% profit in 1 to 2 days,
based on decades of same option data trend configurations.
 
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