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Another problem with examining short option strategies is looking at the
day to day performance of a trade vs the end result.
For example, let's say there's an S&P option short sale that ends up on
expiration day right where it began, so you keep the credit.
BUT...let's say there was at least sometime during the trade when the S&P
rose 20 points. Would your account be able to ride this out given the
margin (and any increases)? Would you be able to stomach this ride?
The real analysis, I believe, isn't an analysis of where the underlying
ended up or will end up, but how far it will rise or fall *AT ANY TIME*
during the period...and whether or not you should place a stop on the
trade.
-RB
on a trade where the underlying (say the S&P) ended up
>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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