Strategy on RUT. Search for the best system.

ERT one week 1 point grid

Systems are RT2_1

S252
5x2

5x5

For the S252 the actual signal is up from 825, target 828 and a stop at 823. All levels are +- one tick (surpassing mode).
 

Attachments

Two Systems applied on RUT

Up S1x1 3*20 points/5 trades
Dn L1x1 4*20 points/5 trades

Current signal is Long from 840 with a trailing stop at 820.

If 820 is crossed to the downside a limit buy is triggered with a trailing profit target of 20 points.
 
I am running a strategy with four legs with IWM options.

Two legs provide immediate credit (short call and short put).
Two legs make a debit (long call and put).

The writing of the options is nearer at the money than the bought options.

I treat that also a bear-call spread / bull-put spread combination.

My goal is to keep the premium upon the spread's expiration.
The long positions are for protection issues.
The additional OTM calls are also for long term up speculation.

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Transactions

IWM JUL07 88 C 06/25 1 0.2000 -20.00 -1.00
IWM JUL07 83 C 06/25 -1 1.7300 173.00 -1.00
IWM JUL07 83 P 06/25 -1 1.7400 174.00 -1.00
IWM JUL07 77 P 06/25 1 0.3600 -36.00 -1.00

IWM JUL07 88 C 06/25 2 0.1500 -30.00 -1.50

Total 261.00 -5.50 commission = 255.51
Required margin ca. 1200

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Settlement 06/25

IOWGE 2007-07-21 IWM JUL07 83 C -1 1.403348 100 -140.33
IOWGJ 2007-07-21 IWM JUL07 88 C 3 0.145977 100 43.79
IOWSE 2007-07-21 IWM JUL07 83 P -1 2.191025 100 -219.10
IOWSY 2007-07-21 IWM JUL07 77 P 1 0.416279 100 41.63
Total -274.01

Profit -18.51
 
Don Fishback sells a trading plan called ODDS which does the same thing: sell credit spreads. Sell an out-of-the-money Call credit spread AND sell an out-of-the-money Put credit spread.

Fishback uses the options' implied volatility as an estimate of the standard deviation "sigma". He tells you to choose strike prices that are at least 1.3 sigmas out of the money, which (if you believe in the lognormal distribution) means there is a 90% chance the Call spread will expire out of the money and you'll get to keep all the premium collected. Same on the Put side: there's a 90% chance the Put spread will expire out of the money and you'll get to keep all the premium collected.

Fishback tells you to use an options price calculator like Black Scholes, to compute the theoretical prices of both Calls and of both Puts. This lets you calculate the theoretical Fair Value of the put spread and of the call spread. Then when putting on the trades, use Limit orders to sell the spreads for a credit of Fair Value or better.
 
MGJ

You provided very valuable information.

Thank you!

PS: I will also add a variable for the expected directional move. Therefore I will need at least 30 month of historical data of the IWM.
 
For directional judgement I see two systems.
(All is based on a 5 point grid over 5 years.)

One is for up movements and one for down movements (please see attached graphics).

If the IWM is in an up move I go with the trend based on

System S131 with profit of 25 points in 5 trades

(Stop crossing the first 5 point line, get out at 15 points and trail with 5 points on the grid lines).

If the IWM is going down, I simply buy the dips.

System L121 with profit of 20 points in 4 trades

Depending on my risk management parameters there is need to employ a close auto stop below my entry. 5 points would have been a good value for the last 5 years.

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Next signal

Buy dip at 80 with a target of 3*5 = 15 points
Stop at 75

(that's the combination of the two systems L121 and S131)

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Time to complete

Last three occurencances took 6, 12 and 13 month to complete a 15 points move. That's 1.15 - 2.5 points avg. per month for half of a year or longer.

Because of the long term up side bias I have to calculate with an avg. move of 0.80 point per month anyway. That means that a buy and hold (or put/bull put spread writing strategy would have been successful - in hindsight - in this instrument over 5 years now!)
 

Attachments

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Transactions

6) IWM JUL07 88 C 06/26 2 0.1300 -26.00 -1.50

1) IWM JUL07 88 C 06/25 1 0.2000 -20.00 -1.00
2) IWM JUL07 83 C 06/25 -1 1.7300 173.00 -1.00
3) IWM JUL07 83 P 06/25 -1 1.7400 174.00 -1.00
4) IWM JUL07 77 P 06/25 1 0.3600 -36.00 -1.00
5) IWM JUL07 88 C 06/25 2 0.1500 -30.00 -1.50

Total 228.00 (incl. commission)

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Settlement 06/26

IOWGE 2007-07-21 IWM JUL07 83 C -1 1.127867 100 -112.79
IOWGJ 2007-07-21 IWM JUL07 88 C 5 0.108496 100 54.25
IOWSE 2007-07-21 IWM JUL07 83 P -1 2.557494 100 -255.75
IOWSY 2007-07-21 IWM JUL07 77 P 1 0.555436 100 55.54

Total -258.75 (before closing transaction costs)


Profit -30.75
 
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