Actually I think the futures have more volatility than the cash values. The traders on the floor can cause wilder swings than the actual cash index would move so the cash vol might underestimate slightly. For example the S&P high low has a spread of just over 5 as of now and the current ES has a range of 6 points. Will it matter, I have never tested this so cannot say for sure if and how much cash vol will underestimate the futures vol. Also I cannot say it would be a good proxy for 6 months out. In the S&P example, the VIX/VXN is only one month out and I would not extrapolate out 6 months on it. Also I would not sell premium 6 months out.
Remember I am only going out at most about 45 days, with a rare case adding a few days more. So I only want to "forecast out the next 30 - 45 days. If you want the market makers short-term forecast as of today, I say take the ATM straddle on the options and double it. That gives you quick and dirty 2 sigma range as priced by the MMs.
So one short answer is to take backtest the historical cash vols and actual statistical vols on the futures and see how close or far off they seem to be. Another test is to take statistical vol on the futures in 30 day increments over the past year and average them out for a good proxy of month to month volatility. Then double that number and run simulations and choose strikes on the edges of the distribution.
As for drawdowns it is tricky. When I have to adjust a position I take an initial hit on closing the to be rolled up spread which is mostly offset by the adjusted spread if it expires worthless. So sometimes the account takes a hit until the adjusted positions close and I make most or all of it back, plus profits from partial hedges. I also roll up or add spreads to the other side to bring in additional income and either wipe out the loss or result in a limited loss. The market action this past year or two has not been overly volatile so I have made adjustments but never took outright losses. I think the largest hit I took was about 5% of margin. Since this is my own money and not managed money, I do not track it as accurately as a fund would
. Same for Sharpe ratios and the like.
As for Data, two people have posted detailed statistics about monthly changes in the price of the S&P and it is sort of buried in the pages here. But look for a posting with a long list of data going back quite a few years. I do not have anything right now as organzied to reproduce here. Most of my studies are spread out over time and mostly studying the technical indicators and seasonal price swings.
SPX has a majordrawback on the b/a spreads and when the ca ca hits the fan it can be frustrating making adjustments and waiting for positions to fill. There is no easy answer in SPX land but I hope you have better spreads in the ED options.
As for my approach and system it is very hands on and as many have learned when asking me questions I have plenty of general guidleines I give for strike selection and adjustments but I cannot really adopt rigid rules since I need to stay in tune with what the market is doing and react accordingly. I talk about the 15 point wall for follow up actions/adjustments but I have also left positions in place where that wall was breached based on my analysis of market conditions and expectations on the SET. The risk is too great in this strategy to simply go by a rigid set of rules. I do have my parameters I follow and risk management guidelines but I also need to use my experience and instincts to adapt to the market and that is why this strategy takes so much risk management.
OK long winded here.. sorry..
Quote from WinDiff:
Are you saying that cash volatility is a good proxy for the volatility of the contract 6 months out? I will test using cash prices and will see where I get.
On another note, what is your worst percentage drawdown using this strategy and what results do you get, both in terms of annual sharp ratio and max DD. Could you be so kind to post some data on your tests for the period 2000 to 2002?
P.S. One major issue I have with limit orders is estimating the execution risk vs slippage and max exposure when operating within the 15pts danger zone! In my experience limit orders are just scary thought.
Your confidence in what you are doing here is simply unattainable using just discretionary trading with that type of risk! Would you mind sharing how you test?
Regards,
WinDiff
