Free Expected Move spreadsheet from TT

EM spreadsheet.PNG

Tastytrade is giving free spreadsheet for expected move (EM) calculation for Futures and Indices, kudos to Tastytrade team.

https://www.tastytrade.com/tt/shows/the-skinny-on-options-data-science/episodes/spreadsheet-for-calculating-expected-moves-05-05-2016

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Back Testing Weekly Option on SPY

backtest SPY

The above is the result of back test of SPY using delta neutral strategy.

Assumptions

  1. Weekly option open on Monday
  2. Premium collected around $0.15
  3. Close on the last day market close
  4. Loss is calculated base on the different of the 1 SD and closing price
  5. Strategy used is Delta neutral (Strangle or IC with $2 wide spread )

Observation

  1. The 17 trades resulted in a net loss
  2. Undefined risk or wide spread protection will result in higher loss
  3. Winrate 82% but the 3 trades loss can wipe out the profit
  4. Commission will result in a bigger loss

Conclusion

Even with stop loss for every trade or use 1 SD IC with maximum $1 loss spread will result in a loss and the commission will wipe out that profit. This option system is not workable in long run.

 

 

Advance Option Strategy

Timeismoney advance option startegy table.JPG

Above table is from the book “Time Is Money – The power of non-directional options trading.” by Kerry W. Given.

Now I understand why my friend use only one strategy and that is double diagonal to trade option and nothing else, it suit those low to medium risk personality.

Currently, I am doing Butterfly, Calendar and short term Iron Condor but will expand to include the rest in my option play.

 

 

 

Manage Your Risk

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In Chapter 3 of this book titled “The Secret of Option Trading” is MANAGE YOUR RISK.

He gave the simple guidelines:

  1. Use Stop LossI have a bad habit of not putting my stop loss order, I need to improve in that area.
  2. The 200% rule – use 3 times of premium collected to exit a bad trade, I can stomach heavier losses.
  3. Adjusting the PositionThis is my key focus now; practice, practice and more practice. 
  4. Money ManagementI trade small but trade frequent but also need to follow this closely.

MANAGE YOUR RISK (Kerry Given) and MANAGE YOUR WINNER (Tom Sosnoff) both are different in option trading and it is good to understand both side of the camp on where they are coming from. Personally, I think both are right, their reasoning is valid but most importantly is how do I integrate them in my option play.