Purely Mechanical Option Trading

[dipper17]

Perhaps you can answer this question then?

Since your system does not have the ability to calculate the value of any options since it does not use any of the information which the options prices come from how could it predict the odds of a 25 % increase in the value of an option?


The system as you have described has no ability to price the option on a future date or at a future value in the underlying nor know how far the underlying stock/index would have to move in order for that option to increase 25 to 30%.

For example the required move in the index for any option to increase in value by 25% today would be different for that option to move 25% tomorrow.

 

[jeffalvinson]

Quote from dipper17:

Perhaps you can answer this question then?

Since your system does not have the ability to calculate the value of any options since it does not use any of the information which the options prices come from how could it predict the odds of a 25 % increase in the value of an option?


The system as you have described has no ability to price the option on a future date or at a future value in the underlying nor know how far the underlying stock/index would have to move in order for that option to increase 25 to 30%.

For example the required move in the index for any option to increase in value by 25% today would be different for that option to move 25% tomorrow.

Its works on average performance over time and then underscores the profit potential to adjust for a 75% win/loss.

Obviously it doesn't watch the news for bad or good economic data or earnings reports.....etc.....
These random events are responsible to at least 25% of the trades losing.

 

[dipper17]

Again since there is nothing in your program which has the ability to calculate the future value of options and the move in the underlying which would cause an options value to go up 25% is different each day can you please explain how you your system can predict the odds of an options future value increasing 25%

 

[onthemoney3]

Quote from jeffalvinson:

Its works on average performance over time and then underscores the profit potential to adjust for a 75% win/loss.

Jeff
Why are you defending/explaining/justifying your trading? Post live calls and that will shut everyone up. That is the best, and only <i>real<i> proof.

 

[Prevail]

It is possible to see a divergence between options pricing and the underlying. look at the prices on the day of the last employment report. sp was up, calls were largely down. iv was the main reason, but this was the end of a 4 day trend in call prices. shortly after the sp begins rolling over.

Quote from dipper17:

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.

 

[dipper17]

Quote from Prevail:

It is possible to see a divergence between options pricing and the underlying. look at the prices on the day of the last employment report. sp was up, calls were largely down. iv was the main reason, but this was the end of a 4 day trend in call prices. shortly after the sp begins rolling over.

That would throw a huge damper into his "system".

I believe I mentioned already that there are many times where the index could be up and the calls down due to implied volatility and its skew.

 

[Prevail]

maybe I missed it, but it could also be the basis of the logic.

Quote from dipper17:

That would throw a huge damper into his "system".

I believe I mentioned already that there are many times where the index could be up and the calls down due to implied volatility and its skew.

 

[jeffalvinson]

Quote from dipper17:

Again since there is nothing in your program which has the ability to calculate the future value of options and the move in the underlying which would cause an options value to go up 25% is different each day can you please explain how you your system can predict the odds of an options future value increasing 25%

Your making one assumption which is incorrect.
Your assuming the system says,
"Lets buy a call at the open of the next trading day and the SPX
will rise enough to give that SPY option a +25% to +30% profit."

Nothing could be further from the truth!

That would place the system in a one to one relationship with the market and this is "not" what the system does.

The system "stacks the odds in its favor."
I can hear you saying, "How?"

The answer to that question (in my opinion) is the
"Key to Successful Options Trading in a Directional Manner."

Here's the Answer:
"The system doesn't pay retail (previous closing price)."
In fact it buys deep discounts with respect to the closing price of the trade option.
Example of a Call Trade:
It outputs an entry price (buy limit order) that usually isn't filled unless the SPX is -15 to -30 points underwater.
If the deep discounted entry price is filled,
the sell limit order of +25% to +30% is sometimes sold (but not always) before the SPX ever enters positive territory.
Essentially a fair amount of call trades are sold profitably without the market ever going positive,
and a fair amount of put trades are sold profitably without the market ever going negative.
Its a tough concept to understand unless you have seen it work over time.
Of course that means you are constantly buying into darkness
(fear), which is "mentally difficult" and that's the reason I use
semi-automated Bracket and OCA orders and then head for the hills (metaphorically).

Also, the frequency of entries being filled (6 to 12 per month) are much lower because of the entry discounts, but the trade off is a higher W/L ratio.

 

[dipper17]

I have not made any assumptions. The problem I have is you don’t seem to grasp the FACT that the price of the options is not predicated on yesterday’s options prices.

The “system” can only pay what the offer is in the options, whether you call it retail price or not is irrelevant. There is no way to buy options at a “discount” to fair value in the market. If that opportunity existed it would create an arbitrage opportunity which would be closed by the market before you would get in. By the way there is no official “closing price” on an options contract. The last trade of the day may have occurred long before the market closes. In addition the last trade of the day has NO relationship to where the option will open tomorrow. Since the last trade may and often does occur before the close of the stock market and underlying index. It also may have no relation to where fair value for that option might be at the close of the market. Frequently you will have the last trade of the day occurring outside the final bid offer spread simply because the market in the underlying index moved between the time the last trade occurred and the market closed.

Looking at the SPY options it’s a very liquid market, and very very efficient. There is no way to buy any particular option at a discount to the market. The problem you’re having is you believe that when you buy a call or put at a discount to yesterday’s last trade you believe it’s a discount to fair value on that option it simply is not.


Its not hard to understand how a put could be bought and sold profitably without the market going negative. For example if the market in the index opened higher and you then bought the put while the market is up on the day, then later that day the market in the index goes lower without going negative, since the market in the index had dropped the put will rise in value from the point you bought it but sill be worth less then yesterdays last trade. Just the reverse could happen in the calls. The prices of the options during the day is predicated on where the index is at that moment, not where the options last trade the previous day occurred.

 

[jeffalvinson]

Quote from dipper17:

Its not hard to understand how a put could be bought and sold profitably without the market going negative. For example if the market in the index opened higher and you then bought the put while the market is up on the day, then later that day the market in the index goes lower without going negative, since the market in the index had dropped the put will rise in value from the point you bought it,
[but still be worth less then yesterdays last trade.] [/B]

Dipper,
Your correct, the option doesn't even have to get back to its previous closing price before it sells.
Example:
Option closed at 2.50
Entry: -25% off the closing price = 1.875 (round to 1.88)
Entry: 1.88
Exit: 1.88 times 1.25 = 2.35
Exit: 2.35 (never had to even rise to yesterday's close of 2.50)
1.88 times 1.3 = 2.44 (never had to rise to yesterday's close)

Bought into darkness and the market wasn't even positive before it was sold. Option didn't even get back up to its previous closing price before selling profitably.

I know this works because I have been doing for years,
even before I had computer programs.

But, its not my original idea. When I lived in the Midwest and was heavily trading OEX options, I had a friend who was a former
CBOE market maker.
He suggested it because he said the OEX options were priced unfairly, in fact they were a "royal screw job" (as he put it).
He felt so "dirty" working for the CBOE that he quit and went back to college (in his 30's) and became a Vet (animal Doctor).
That's how I met him, he was my dog's Vet.