Using options to improve a strategy

M

maninjapan

I was wondering if anyone has attempted to or has had success with improving a system's performance (or at least reducing risk and margin requirements without too much degradation of returns) by replacing the underlying ( stocks or futures) with options.

I have a strategy that has back-tested with the following performance stats and forward testing is showing reasonably similar numbers (still only a small number of completed trades though so a work in progress)

Start Capital $200k
Pos. Size : $20k
period : 1/2006 12/2013
Net PL: $877,378
No. trades : 945
Win%: 65%
Avg Win: $2255
Avg Loss: -$1630
PF: 2.67
Max DD: $91k 1/29/2009 (2nd Largest DD was $17k in 2007)
Longest DD Period: 7/8/2008 - 3/6/2009

It is a Long only strategy on US equities, holding time is 30-60 calendar days.
There are usually 3-8 positions on at any one time so capital is it is relatively capital intensive.

I am in the process of manually testing different option spread combinations against the signals looking to reduce capital requirements and in the hope of finding something that will reduce risk (wouldn't really want to have to go through a 45% draw down in real life) without reducing profitability by too much.

Does anyone have any suggestions as to what kind of options strategy they would use, if any, based on the information provided?
 
Back Ratio spreads can significantly reduce risk & capital requirements. Play with itm options with varying spread widths. That should get you started.

But like anything which reduces risk, there is a price to pay & profits suffer.
 
Cheers Stock, Definitely understood regarding reductions in profit/general performance, but something I'm more than willing to accept ( within reason) if it means a noticeable reduction in draw down and margin requirements.
Will give these a try and see how we go
 
Maybe deep ITM LEAPs can be one of the solutions... But based on my test and 7 years of trading options I came to conclusion, that there are better ways to improve margin requirements and risk than using options...

So far mixing stock strategies and trying to improve them with option was not cost-effective for me.


to StockApprentice:
"But like anything which reduces risk, there is a price to pay & profits suffer." Not true...

There are some short stock trading strategies which works very well as insurance - in sideways/up markets doing small amout of gains (commissions and slippage included), in case of markets going south they are making lot of money, more than offsetting long only strategies. So there is no reason not to include those strategies, because they lower overal margin requirements and make whole portfolio more stable (more Beta neutral)...
 
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