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This illustrates something that has kept me away from options. How can you
backtest strategies to determine if you have an edge? There doesn't seem to
be any option software that does this.
-----Original Message-----
From: THE DOCTOR <droex@xxxxxxxxxxxx>
To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
Date: Monday, July 20, 1998 11:24 AM
Subject: Re: Option Strategy
The analysis is fundamentally correct, but unweighted. You have to examine
what you lose the 10% of the time that the vol is wrong.
If a strategy made you money 90% of the time would that be enough?
Let's say the same strategy would bankrupt you 2% of the time...same
strategy.
Stuart Hazlewood wrote:
> I just finished reading a book by someone called K. Anand containing some
rudimentary option strategies (backspreads, naked strangles, hedged with a
long straddle when IV falls, etc.)
>
> The news in it was the following: according to the author Implied
Volatility provides the real range for the market over any given time
period. Thus you take the at the money IV for let's say the S&P and project
the market range based on this number. For example, assume the following:
>
> Sept S&P is @ 1200
> At the Money IV = 15%
> Days to expiration (August) = 32
>
> Expected movement = sqr root (32/365) * 1200 * .15 = 53
> Expected range at expiration = 1147 to 1253
>
> The real news is that, according to Anand, this range has held true
historically 90% of the time. He therefore recommends strategies that are
short at 1 sigma based on the at the money IV.
>
> Since I have not been able to find a database of at the money IV for the
S&P, I have not been able to back test the theory. Any comments?
>
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