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The Golden Relationship
- Thread starter riskfreetrading
- Start date
Quote from nazzdack:
Don't take this the "wrong way"........you seem to be asking too many questions and doing too little trading to corroborate your "research".
Thanks for your concerns. What makes you think that I am not over trading? Do you trade? If yes on what basis do you define little or too much trading. Do not take it the "wrong way"... I just wanted to know how you determine too little and too much trading.
But my guess is that you are an experienced trader. Do you trade mainly options or underlyings?
Also the process I adopt in determining trading strategies, is to first develop it, understand it, test it on paper, then with some live money, then increase the live money if strategy is making money. Am I doing something wrong?
Fair enough..........Try to get to the "live money" part of the process more quickly. You may find yourself in a scenario whereby the research you do takes place during a more profitable time period for your strategy but by the time you trade real money, the optimal conditions diminsh making your method less profitable or even worse, a loser.
Quote from dd4nyc:
Minimizes or maximizes? And maximizes area in terms of what? Also what does area mean? Certainly it is not the expected return... I'm totally lost here.
Sorry I miswrote. It should minimize the area. I think this issue is uselfy mainly for mathematical analysis, but since you seem to want a clarification, I hope this will help.
In the plot you posted, there is a red and a blue curve. Now suppose one draws three vertical lines at three different strikes: One at the golden strike (K*), the two others are to left and to the right of K*.
For each of the vertical lines look at the sum area of these two subareas:
1) Area under the red curve from 80 up to the strike corresponding to the vertical line.
2) Area under the blue curve from 120 to the strike corresponding to the vertical line.
By visual inspection (or actual calculations) you should be able to conclude that the sum of the areas in 1) and 2) is the smallest when the vertical line is at the golden strike, and this vertical line will pass at the point where the red and blue curves intersect.
Quote from nazzdack:
Fair enough..........Try to get to the "live money" part of the process more quickly. You may find yourself in a scenario whereby the research you do takes place during a more profitable time period for your strategy but by the time you trade real money, the optimal conditions diminsh making your method less profitable or even worse, a loser.
Thanks for the suggestion. Also you mentioned some items in your first post. Do you have any experience with trading premium in relation to the discussion in this thread?
Quote from dd4nyc:
Well, I can add that your golden strike is not constant in delta. Golden strike increases in delta with expiration and volatility.
That is consistent with my thinking.
I would also add that the delta will stay within the interval 0.33 and 0.5 (0.33 and 0.5 exclusive). Most likely delta will be in the 0.4 range. Is this what you obtained for your numbers?
It is interesting to note that the golden strike will be hit in the order of 70% to 90% of the time before expiry!