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Lionel,
don't forget we are talking options here. It is well nigh impossible to
create a mechanical option trading system, let alone optimize it. The first
reason is the fundamental lack of historical data for the millions of
options generated through the different option series with their strikes;
furthermore, there are additional outside factors such as early exercise in
the OEX etc. Also please reread what I wrote about "readjustment rules"
below.
I have yet to see a real mechanical trading system for options. There have
been attempts at such systems, such as Essex Option Pro, but these are
extremely limited.
For stocks and futures, though, your suggestion certainly makes sense to me.
Kind regards,
Michael
-----Ursprüngliche Nachricht-----
Von: owner-metastock@xxxxxxxxxxxxx
[mailto:owner-metastock@xxxxxxxxxxxxx]Im Auftrag von Lionel Issen
Gesendet: Sunday, August 13, 2000 20:01
An: metastock@xxxxxxxxxxxxx
Betreff: Re: What options to sell?
Michael wrote:
>" Anyone who has ever devised a mechanical trading system will have had
this
> experience: you change a certain parameter a little - just a little! - and
> test results start diverging by a wide margin. Unfortunately, most of the
> time this happens, results deteriorate."
One way to overcome this problem is to run the system and optimize it. Do
this for several similar securities. Each time you run the optimizer you may
find one set of parameters that gives outstanding results, and a group of
parameters that give results that are not as outstanding but are grouped
close to each other. What you should try is some average values of the
parameters. These values should be sturdy in that varying them a little
will not change your results very much. I got this from Investors FastTrack
3rd party software.
Lionel Issen
lissen@xxxxxxxxx
----- Original Message -----
From: Michael Suesserott <MikeSuesserott@xxxxxxxxxxx>
To: <metastock@xxxxxxxxxxxxx>
Sent: Sunday, August 13, 2000 6:14 AM
Subject: AW: What options to sell?
> Gitanshu,
>
> thanks for your interesting post, and also for the friendly and
constructive
> approach you are taking. Like yourself, I entered into this thread in a
> spirit of trying to be helpful. There is nothing I stand to gain through
my
> posting here, and I assure you I would immediately fall silent if any
> flaming arose from it.
>
> As you surmised, I am well aware of the points you are raising. Though the
> counterexample you were using does not describe my position quite
> correctly - I would not think it advisable in Guy's case to buy puts with
> only one week to go - still I agree that there are many different spread
> positions that could be used to trade direction to good advantage.
>
> In fact, one additional strategy that I like to use sometimes to trade
> direction is the sale of backspreads (provided volatilities are right, and
> there is a certain volatility skew). So there are indeed many avenues to
> explore in any given situation, as you were rightly stating.
>
> Now let me explain why I don't think these applicable in the case of Guy's
> system.
>
> Anyone who has ever devised a mechanical trading system will have had this
> experience: you change a certain parameter a little - just a little! - and
> test results start diverging by a wide margin. Unfortunately, most of the
> time this happens, results deteriorate.
>
> Now here we have this successful trading system that it took Guy and his
> family 30 years to develop. Don't you agree that Guy would be well advised
> to be extremely careful, even reluctant, to change his system?
>
> There can be no doubt that replacing futures with option spreads,
especially
> those where one gets short premium, thus limiting possible profits,
> constitutes a fundamental change of main characteristics of a trading
> system. To name only one effect that is immediately obvious - the big per
> trade profits (up to 150 points, as Guy stated) just wouldn't have
occurred.
> It is true that losses (up to 62 points), too, might have been less, but
> since the system had 19 winning trades and only 3 losing ones, the use of
> credit spreads would very likely have led to a severe deterioration of the
> system.
>
> Besides, many types of spreads require the use of stops, or at least
> constant supervision and readjustment; readjustment "rules" are not really
> clear-cut because there is a choice of option strikes and volatilities and
> deltas, even different follow-up strategies, with the ensuing action to be
> individually determined by the trader in each and every case. If you can
> call this a "system" at all, it will certainly not be the same system Guy
> had been trading before.
>
> That is why I didn't take spread trading into consideration in my posts.
The
> only option strategy that would preserve the characteristics of Guy's
system
> at least to a reasonable extent, would be the simple purchase of puts or
> calls, as the case may be.
>
> This strategy may indeed prove useful in catastrophic situations such as
the
> October 87 crash where prices moved more than 12 standard deviations, an
> event that statistically should have occurred less than once in the
history
> of the universe.
>
> Kind regards,
>
> Michael Suesserott
>
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