Hello All,
I have a few questions about System Trading Options. It's a little difficult to have a system trade them because of the various strike prices, and expiration's.
So I was wondering:
What strike price do you use to trade off of, do you use the strike price that is closest to the close at the current time for the course of a week, ITM or OTM?
What contract expiration do you use, do you trade the contract that expires in a month at the time, and trade it for 3 weeks or so?
My system trades on hourly bars and is built on the mother stock. So if I'm trading MSFT Options, I would load the trading system onto the MSFT stock data, but the contract I trade off of would be the MSFT Options.
Thanx for the help, any other tips in the area are welcome also,
Andrew
Options System Trading
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supracharger
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Re: Options System Trading
Hi Supracharger,
If I were you, I'd pick a strategy, then go backtest it on options data, and see what you think. If you've never done that before, you have a few things to look forward to:
1) The fun of spending a couple weeks doing insanely boring and repetitive options chain lookups by hand.
2) Confusion when you get to the end and find that your approach didn't make any money, despite the core system being profitable when used on the underlying stock.
3) Frustration when you realize you now have to test another idea, and must revisit step 1 again.
Options don't work the way you'd think they do. Unlike futures or stock trading which is completely directional, options trading adds more variables to the mix. You can be right on direction, but still lose money because something happened on the volatility end. If you read through the Mechanical Systems book, you can read about my experiences building an options system. My initial expectations were completely backwards from the real world, and although I got it to work in the end, it took at TON of testing to find the path through the forest.
So my advice would be to just pick some method and run with it, but to sit down and crank out a backtest. It's a lot of work, but is the only way to make sure that you know what you're getting into. ThinkOrSwim will provide you with 5 years of options data, so that's a good place to go and get the history, provided you are willing to open an account with them.
One of these days, if I ever get my hands on a room full of programmers, I'm going to get W59 to be able to do automated runs on options history. That doesn't exist in the retail arena currently, although I'm certain they exist in private/institutional hands. Given the results I found in my limited study, I'm pretty sure there's a huge pot of gold in the options market. Just have to get past the data and testing issues...
Regards,
Earik
If I were you, I'd pick a strategy, then go backtest it on options data, and see what you think. If you've never done that before, you have a few things to look forward to:
1) The fun of spending a couple weeks doing insanely boring and repetitive options chain lookups by hand.
2) Confusion when you get to the end and find that your approach didn't make any money, despite the core system being profitable when used on the underlying stock.
3) Frustration when you realize you now have to test another idea, and must revisit step 1 again.
Options don't work the way you'd think they do. Unlike futures or stock trading which is completely directional, options trading adds more variables to the mix. You can be right on direction, but still lose money because something happened on the volatility end. If you read through the Mechanical Systems book, you can read about my experiences building an options system. My initial expectations were completely backwards from the real world, and although I got it to work in the end, it took at TON of testing to find the path through the forest.
So my advice would be to just pick some method and run with it, but to sit down and crank out a backtest. It's a lot of work, but is the only way to make sure that you know what you're getting into. ThinkOrSwim will provide you with 5 years of options data, so that's a good place to go and get the history, provided you are willing to open an account with them.
One of these days, if I ever get my hands on a room full of programmers, I'm going to get W59 to be able to do automated runs on options history. That doesn't exist in the retail arena currently, although I'm certain they exist in private/institutional hands. Given the results I found in my limited study, I'm pretty sure there's a huge pot of gold in the options market. Just have to get past the data and testing issues...
Regards,
Earik
-
supracharger
- Posts: 24
- Joined: Tue Jul 21, 2015 9:32 pm
- Contact:
Re: Options System Trading
Da! Trading Cannot be this Hard. 
-A.
-A.
Re: Options System Trading
Hi Supracharger,
As Earik stated, so much of this depends on the strategy you are using. On a short term strategy, deep ITM options could kill the trade on the spread alone. On longer term strategies, ATM or OTM options could kill the trade based on the time premium.
The first thing I would do to create an options system is make sure that I have a time stop in place. If I know that I am exiting a trade by X date, I know that I don’t want to pay for time premium beyond that date. With weekly options available on many stocks, that can cut the premium quite a bit. This also eliminates any costs due to rollovers.
For strike price, I would suggest putting some sort of volatility test into your system. If the stock only moves .20/day, the spreads that are acceptable are much different than stocks that move $2/day.
Take care,
Kenn
As Earik stated, so much of this depends on the strategy you are using. On a short term strategy, deep ITM options could kill the trade on the spread alone. On longer term strategies, ATM or OTM options could kill the trade based on the time premium.
The first thing I would do to create an options system is make sure that I have a time stop in place. If I know that I am exiting a trade by X date, I know that I don’t want to pay for time premium beyond that date. With weekly options available on many stocks, that can cut the premium quite a bit. This also eliminates any costs due to rollovers.
For strike price, I would suggest putting some sort of volatility test into your system. If the stock only moves .20/day, the spreads that are acceptable are much different than stocks that move $2/day.
Take care,
Kenn
Wave59 Solution Provider
Custom QScript Programming
kenn@scriptbuilder.net
Custom QScript Programming
kenn@scriptbuilder.net
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supracharger
- Posts: 24
- Joined: Tue Jul 21, 2015 9:32 pm
- Contact:
Re: Options System Trading
Thanks Guys,
I think this is the end of the road for Options for me at the moment. It's a shame because it was a good way to limit risk (substantially less capital), and also limit outside noise exposure (meaning the high margin with options, causes one to not stay in as long to make money, limiting problems for the trade to go against you).
I will probably flip back to futures. I've been doing system tests for quite some time now, and need to test out my strategies, and get some kind of profit and knowledge through trading.
Thanx again,
Andrew
I think this is the end of the road for Options for me at the moment. It's a shame because it was a good way to limit risk (substantially less capital), and also limit outside noise exposure (meaning the high margin with options, causes one to not stay in as long to make money, limiting problems for the trade to go against you).
I will probably flip back to futures. I've been doing system tests for quite some time now, and need to test out my strategies, and get some kind of profit and knowledge through trading.
Thanx again,
Andrew
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