Jeff Augen Weekly Strats

[dwilliams8649 4]

Well, I listened to Jeff Augen's webinar. He toted a weekly strategy that he claims has a 90% and above success rate. His reasons on why this trade is so successful are:

• Increased market (makers) efficiency in regards to pricing options to encapsulate weekend time decay. According to Jeff, two years ago, it was around 50%. However, within the last year, over 90% of weekend time decay is priced into the options my market close on Friday.
  
• The foolish retail investor who tries to sell time decay on weeklies in order to make the quick buck.
  
• High index like liquidity of some stocks, such as AAPL. He gave an example using AAPL and AMZN, however, he says these strats will also work on indices.
  

So without further delay... The two strategies that me mentions in order to take advantage of the above are:

1. A long butterfly &
   
2. A short butterfly
   

Well, sounds simple enough. But like with everything else, timing is key. For the Long butterfly trade, Augen sets the following conditions.

• Entry Day: Thursday, when new weeklies enter the market. If a market moving event is expected on Friday (the next day), such as a jobs report, then wait until it's over before entering the trade.
  
• Entry Time: Thursday by 10:00
  
• Trade criteria: ATM (or close to it) butterfly. Highly liquid stock, well, such as AAPL or GOOG.
  
• Exit: He suggests, exiting by Friday close, however, the position could be held until Tuesday (morning?). After which the rapid effects of time decay will begin to take hold of the trade.
  

Well, on my backtesting, I had a very high success rate. I used OnDemand in TOS. I would like to double check the results using another service like OptionVue. But I found it quite hard to lose money. I guess if the stock had a really high open (in the case of AAPL it if the stock gaped up 15 dollars), then we would have to take one for the team. Another thing that I noticed, is that usually I could take the trade off the table by around 10-11 on Friday, with profits. And only on a rare occasion did I have to hold it over the weekend (once, out of over 20 trials).

For the second strategy, the Short butterfly Augen suggests the following.

• Entry Day: Friday expiration day on Weeklies (day 0).
  
• Entry Time: Approx 1pm.
  
• Trade criteria: A reasonably volatile stock, such as, you guessed it, AAPL.
  
• Exit: Well, basically he assumed that within those three hours, that most likely the stock would be ITM or close to it. He didn't give many details, but promised to come back and go into the trade further in another session.
  

Again, using TOS OnDemand, I found that the trade did work as advertised. For my purposes, however, if the trade wasn't profitable after 1 hour, I would do an adjustment by selling another butterfly in the strike right below (upward trending market) or right above (downward trending market) the middle strike of the currently held short butterfly. This reduced my overall exposure and made it easier to profit in the currently trending direction.

Well, that's it... The whole process seemed to good to be true, so I am not sure if there is something wrong with the way TOS OnDemand works in these cases, or if the strategy is really this profitable. However, according to Augen, it's supposed to be. Kim (and forum members) please give your commentary, and test this out as well if you can. The only thing that troubled me slightly during the webinar is that when Augen said that he completely gave up on trying to predict the direction of the market and that doing so is a fools game. He would much prefer to hold cash, and trade such strategies (anomalies) when they appear. However, he did talk briefly at one point about some of his indicators (I am assuming the ones that he built) that his subscribers use to predict the bottoms and tops (basically, the direction) of the market or a particular stock.

-DW

[update]

They upload the video to their site...

http://optionstribe.com/2012/08/recording-of-how-to-capitalize-on-price-distortions-in-weekly-options-jeff-augen/

Edited August 20, 2012 by dwilliams8649

[Kim 7,943]

Just a clarification about terms:

Long butterfly means doing it all with calls or puts. In this case you want the stock to move. You pay debit and you maximum gain is if the stock moves outside the short strikes.

Long Iron butterfly means doing it with puts and calls (like our RUT IC but the short strikes are the same). This is where you get credit and you want the stock to stay near the short strike.

I assume from the context we are talking about the second one (Iron Butterfly)?

An example from your backtesting would give a better picture.

[dwilliams8649 4]

He did it with with all calls or all puts... and yes, when I say long I mean debit, and when I say short I mean credit.

So for the first strat a sample trade would be: BUY TO OPEN +10 AAPL 100 SEP 12 640/635/630 PUT @.30 LMT

The second trade would involve taking the oppose trade, a SELL TO OPEN

[dwilliams8649 4]

Just one more clarification, neither trade was an iron butterfly. They were strictly CALL or PUTs. Someone in the webinar had a similar question on whether it was an iron or not. and Jeff said, no. This would be the long butterfly that I am talking about. The white line, representing the current profit loss, tends to move up the following day, making the trade profitable even when the stock moves a large distance from the center strike.

Edited August 16, 2012 by dwilliams8649

[Kim 7,943]

So for the short butterfly, you want the stock to move or to stay close to ATM (the short strike)?

[Hany 1]

Is the webinar archived online somewhere? If so, can you provide the link?

[dwilliams8649 4]

you want it to move away from the center strike...

I updated the images... for the today...

Edited August 16, 2012 by dwilliams8649

[dwilliams8649 4]

Yes, but I think you have to pay for membership to access the archived video.

[Kim 7,943]

For the long fly, IB definition is sell the mid, buy the wings. This is where you want the stock to stay close to the mid .

For the short fly, IB definition is buy the mid, sell the wings. This is where you want the stock to move.

So with the second strategy, you are betting that in 3 hours on Friday, the stock will move and the move will overcome the theta. You are basically long gamma.

[Hany 1]

DW,

You state that

"For the Long butterfly trade, Augen sets the following conditions.

• Entry Day: Thursday, when new weeklies enter the market. If a market moving event is expected on Friday (the next day), such as a jobs report, then wait until it's over before entering the trade."
  

Why wait till after the jobs report to enter the trade? Most of the time, a jobs report causes the market to move, which is what you want. So it would make more sense to place the trade before the news comes out.

[dwilliams8649 4]

Hey,

Check out the images that I attached... Since it's a net debit trade, and the middle strike (the sold strike) is at the money, you don't want it to move too much.

[dwilliams8649 4]

You can clearly see on the second image, on the short butterfly trade, if you look at the white line, for current P&L, you want the stock to move... and you have three hours to get there.... it's a gamma trade. Jeff's point is that time decay holds up better than expected in the last three hours... so any decent move in the stock should be able to offset theta... and on high flyers, such as apple, there is a good chance the the trade could go ITM. A final note, Jeff, said even if the trade goes into the money, it's better to close it out before market close.

[dwilliams8649 4]

This is the current P&L for the above trade as of now...

Edited August 16, 2012 by dwilliams8649

[ChadK 25]

I can understand the first strategy: Buy an ATM fly, wait for a bunch of time decay to kick in and hope for no price movement, and exit.

I don't get the second strategy: Sell at ATM fly, 2 hours before expiration, in hopes that it moves enough to make money to overcome negative theta?

Can you please tell us about the webinar location anyway? Is this the one from SMB's OptionTribe this week, or something else?

[ChadK 25]

I have access to several tools with intraday option pricing (OptionVue included). (But I don't have a lot of time to invest.) Let's start with strategy #1. You said ATM, but what strike spacing? Last week, 9am CT, GOOG=642.55, a 635-640-645 call butterfly is only $0.65 and has $0.03 in comms (assuming $0.75/contract). That's 4.6% in, and 4.6% out. You need to make 9.2% just to cover comms. Then let's talk about slippage. The market is closed right now, so I can't see how wide the market is, but assuming it's somewhat tight, but you have to cave in a nickel to get filled to get in. Well, that nickel is another 7.7%. Now you need to make 16.9% just to break even, assuming no slippage to get out.

Taking this GOOG example from Aug 9th, in one hour (after 9am CT), this trade is down 25%. End of day -11%.

Friday:

8:30am CT: -18%

9:30 +9%

10:30 -14%

11:30 0%

12:30 13%

13:30 2%

14:30 9%

EOD 9%

You don't even want to know about Monday. Started -17%, and proceeded to -93% at EOD, without adjustments.

[ChadK 25]

Sorry to be a serial poster, but this same trade (GOOG, Aug 9th) with a 10 point wing width, was >15% return most of Friday, and at times over 20%, with EOD at 19%. Monday morning was painful at -7%, progressing to -64% at EOD.

[fieldydwb 31]

For AMZN:

I backtested purchasing 10 contracts on Thursday based around ATM and selling the following day (Friday). So if the open price was 220, the butterfly would be 215/220/225.

Edited August 16, 2012 by fieldydwb

[ChadK 25]

Okay, last post on this until I get some feedback/direction/suggestions.

AAPL, Aug 9th, 9am CT @ 620

615-620-625 5 point wings

Thursday EOD 10%

Friday open -12%, 9:30 10%, 10:30 6%, 11:30 14%, 12:30 14%, 13:30 25%, 14:30 10%, EOD 22%

Monday open 0%, high of 14%-ish, EOD -24%

610-620-630 10 point wings

Thursday EOD 11%

Friday open 8%, then hourly: 15%, 18%, 23%, 25%, 27%, 22% EOD 28%

Monday open 10%, high of 20%-ish, EOD -4%

[ChadK 25]

For AMZN:

I backtested purchasing 10 contracts on Thursday based around ATM and selling the following day (Friday). So if the open price was 220, the butterfly would be 215/220/225.

Starting at 9am CT, and using 5 point wings like you did:

Aug 9th, 235 center, $1.15 enter, 0% EOD Thursday, +17% EOD Friday after comms

Aug 2nd, 230 center, $1.165, -26% EOD Thursday, -18% EOD Friday (-39% at 11:50am CT)

Jul 26, 220 center, $0.325, -67% EOD Thursday, -9% EOD Friday (-60% at 13:40 CT) (earnings after market close Thursday, not a good trade)

Jul 19, 225 center, $0.425, -7% EOD Thursday, -12% EOD Friday

Jul 12, 215 center, $1.085, 0% EOD Thursday, -3% EOD Friday (-17% at 14:00 CT)

It would appear that using intraday data is not matching up with your results very well.

I've added a picture of P&L plotted for every FIVE minutes on Friday July 13th for the July 12th trade. The cursor is at the -17%, 2pm CT price. You can see the string of dots representing price of the spread through the day. In this example, AMZN opened at $216 and the position was -3%. AMZN went as low as $214.30 at 8:50am CT, where the position was -2%. At 10am CT, AMZN was at $215 and the position was up 9% (after comms). AMZN ran up to $219.22 for the high of the day at 2pm CT, then retraced to $218.50 at the EOD, with the position finishing up at -3%.

Edited August 16, 2012 by chadk

[fieldydwb 31]

Using Thinkback TOS:

Aug 2: The butterfly debt is .91 and on Aug 3 the debit is 1.00 but you are getting -18% EOD on Fri and -26 EOD on Thurs. I don't know how much we can rely on TOS.

What did you get for the May 24, May 31, Jun 14 and Jun 21 dates?

[ChadK 25]

Using Thinkback TOS:

That's EOD data only. Two issues with that. 1) Last price posted can be out of whack with the prices for the prior 5, 10, 15, or 30 minutes. ie. the last print can be an outlier. 2) The strategy says enter no later than 10am (I assumed that was ET, so I used 9am CT).

Aug 2: The butterfly debt is .91 and on Aug 3 the debit is 1.00 but you are getting -18% EOD on Fri and -26 EOD on Thurs. I don't know how much we can rely on TOS.

Again, mine was based on entering at 9am CT, and therefore we may have 1) different strikes and 2) different prices, or both.

What did you get for the May 24, May 31, Jun 14 and Jun 21 dates?

I stopped where I did due to unfavorable (IMO) results.

[tjlocke99 18]

This is the current P&L for the above trade as of now...

I don't get this. This is a short butterfly opened on the calls that expire 17 Aug? I thought Jeff's strategy was to do this on the last 3 hours on the 17th, so how would this trade make sense?

[dwilliams8649 4]

@chadk, first of all, I just wanted to say thank you...

I can understand the first strategy: Buy an ATM fly, wait for a bunch of time decay to kick in and hope for no price movement, and exit.

I don't get the second strategy: Sell at ATM fly, 2 hours before expiration, in hopes that it moves enough to make money to overcome negative theta?

Can you please tell us about the webinar location anyway? Is this the one from SMB's OptionTribe this week, or something else?

Yes, it was the one with SMB Option's Tribe that was held a few days ago. However, although the live webinar was free, the recorded session is not free2play.

And it's supposed to be a time strategy, but not in the tradition sense. The point of it is to bank on the forced price adjustments of market makers to incorporate weekend time decay into the option's price by end of day. Depending on how efficient this was, this trade could be a big FAIL by Monday.

For the second strategy, you do the reverse trade at 1pm EST and you're hoping that the stock moves in the final 3hours before close. Gamma is very high, so a slight move in the stock can be very profitable. I've experienced 70-80% returns while backtesting this strategy.

I have access to several tools with intraday option pricing (OptionVue included). (But I don't have a lot of time to invest.) Let's start with strategy #1. You said ATM, but what strike spacing? Last week, 9am CT, GOOG=642.55, a 635-640-645 call butterfly is only $0.65 and has $0.03 in comms (assuming $0.75/contract). That's 4.6% in, and 4.6% out. You need to make 9.2% just to cover comms. Then let's talk about slippage. The market is closed right now, so I can't see how wide the market is, but assuming it's somewhat tight, but you have to cave in a nickel to get filled to get in. Well, that nickel is another 7.7%. Now you need to make 16.9% just to break even, assuming no slippage to get out.

Taking this GOOG example from Aug 9th, in one hour (after 9am CT), this trade is down 25%. End of day -11%.

Friday:

8:30am CT: -18%

9:30 +9%

10:30 -14%

11:30 0%

12:30 13%

13:30 2%

14:30 9%

EOD 9%

You don't even want to know about Monday. Started -17%, and proceeded to -93% at EOD, without adjustments.

Augen seemed to have a fancy on AAPL, and referred to it as a index in its own right. I also don't think slippage would be a problem with an ATM butterfly on AAPL as its highly liquid. During the webinar, Augen used 5 point spaced strikes.

Okay, last post on this until I get some feedback/direction/suggestions.

AAPL, Aug 9th, 9am CT @ 620

615-620-625 5 point wings

Thursday EOD 10%

Friday open -12%, 9:30 10%, 10:30 6%, 11:30 14%, 12:30 14%, 13:30 25%, 14:30 10%, EOD 22%

Monday open 0%, high of 14%-ish, EOD -24%

610-620-630 10 point wings

Thursday EOD 11%

Friday open 8%, then hourly: 15%, 18%, 23%, 25%, 27%, 22% EOD 28%

Monday open 10%, high of 20%-ish, EOD -4%

The point of the trade is for the middle strike to lose as much value as possible by EOD Friday as the MMs price in weekend time decay. So, it would seem that the 10 point wings would be more profitable generally??

During my backtesting with TOS OnDemand, I would have profit spikes during the day of over 30% on AAPL. As I only used AAPL, I can't really speak on the results of GOOG and AMZN, but I will do more testing on these stocks and on SPY and RUT.

[tjlocke99 18]

Well, I listened to Jeff Augen's webinar. He toted a weekly strategy that he claims has a 90% and above success rate. His reasons on why this trade is so successful are:

• Increased market (makers) efficiency in regards to pricing options to encapsulate weekend time decay. According to Jeff, two years ago, it was around 50%. However, within the last year, over 90% of weekend time decay is priced into the options my market close on Friday.
  
• The foolish retail investor who tries to sell time decay on weeklies in order to make the quick buck.
  
• High index like liquidity of some stocks, such as AAPL. He gave an example using AAPL and AMZN, however, he says these strats will also work on indices.
  

So without further delay... The two strategies that me mentions in order to take advantage of the above are:

1. A long butterfly &
   
2. A short butterfly
   

Well, sounds simple enough. But like with everything else, timing is key. For the Long butterfly trade, Augen sets the following conditions.

• Entry Day: Thursday, when new weeklies enter the market. If a market moving event is expected on Friday (the next day), such as a jobs report, then wait until it's over before entering the trade.
  
• Entry Time: Thursday by 10:00
  
• Trade criteria: ATM (or close to it) butterfly. Highly liquid stock, well, such as AAPL or GOOG.
  
• Exit: He suggests, exiting by Friday close, however, the position could be held until Tuesday (morning?). After which the rapid effects of time decay will begin to take hold of the trade.
  

Well, on my backtesting, I had a very high success rate. I used OnDemand in TOS. I would like to double check the results using another service like OptionVue. But I found it quite hard to lose money. I guess if the stock had a really high open (in the case of AAPL it if the stock gaped up 15 dollars), then we would have to take one for the team. Another thing that I noticed, is that usually I could take the trade off the table by around 10-11 on Friday, with profits. And only on a rare occasion did I have to hold it over the weekend (once, out of over 20 trials).

For the second strategy, the Short butterfly Augen suggests the following.

• Entry Day: Friday expiration day on Weeklies (day 0).
  
• Entry Time: Approx 1pm.
  
• Trade criteria: A reasonably volatile stock, such as, you guessed it, AAPL.
  
• Exit: Well, basically he assumed that within those three hours, that most likely the stock would be ITM or close to it. He didn't give many details, but promised to come back and go into the trade further in another session.
  

Again, using TOS OnDemand, I found that the trade did work as advertised. For my purposes, however, if the trade wasn't profitable after 1 hour, I would do an adjustment by selling another butterfly in the strike right below (upward trending market) or right above (downward trending market) the middle strike of the currently held short butterfly. This reduced my overall exposure and made it easier to profit in the currently trending direction.

Well, that's it... The whole process seemed to good to be true, so I am not sure if there is something wrong with the way TOS OnDemand works in these cases, or if the strategy is really this profitable. However, according to Augen, it's supposed to be. Kim (and forum members) please give your commentary, and test this out as well if you can. The only thing that troubled me slightly during the webinar is that when Augen said that he completely gave up on trying to predict the direction of the market and that doing so is a fools game. He would much prefer to hold cash, and trade such strategies (anomalies) when they appear. However, he did talk briefly at one point about some of his indicators (I am assuming the ones that he built) that his subscribers use to predict the bottoms and tops (basically, the direction) of the market or a particular stock.

-DW

I have read several of Jeff Augen's books. (Next to Kim of course) He is one of my heroes. However, what I get from Jeff Augen is not "a trade" but a few key concepts:

1. You can inexpensively build your own robust option analytic tools

2. Option strategies come and go and you have to be able to use a strategy while it will work. Strategies do not generally remain effective forever because once a strategy becomes known and is used the market clears up that anomaly. I think Chris probably has implemented this idea from the posts that he makes.

So Jeff gives examples of trades that could work in many of his books, HOWEVER I think many of them are ones that many of us on this forum would hesitate to trade. For example in his book on trading options at expiration he talks alot about doing ratio trades where several of your positions are naked.

If you read some of Jeff Augen's articles on SFO mag he has also indicated the volatility trades that are done here are not really effective anymore. However I think this group would disagree. These option pre-earnings IV trade concepts appear in Jeff's book on volatility BUT Kim has tuned those strategies to make them effective. I think Kim can give us alot of incite here.

Additionally Jeff does not account for trading costs which reduce profitability.

That being said I think the man is a genius and just understanding his line of thinking seems to be well worth reading his books. He is definitely one of my heroes

[dwilliams8649 4]

I don't get this. This is a short butterfly opened on the calls that expire 17 Aug? I thought Jeff's strategy was to do this on the last 3 hours on the 17th, so how would this trade make sense?

I just used it for Thursday (and in the final 2 hours), just to show how the trade would be done... but you're correct, it should be done on Friday, expiration day (and in the final 3 hours).

[dwilliams8649 4]

I have read several of Jeff Augen's books. (Next to Kim of course) He is one of my heroes. However, what I get from Jeff Augen is not "a trade" but a few key concepts:

1. You can inexpensively build your own robust option analytic tools

2. Option strategies come and go and you have to be able to use a strategy while it will work. Strategies do not generally remain effective forever because once a strategy becomes known and is used the market clears up that anomaly. I think Chris probably has implemented this idea from the posts that he makes.

So Jeff gives examples of trades that could work in many of his books, HOWEVER I think many of them are ones that many of us on this forum would hesitate to trade. For example in his book on trading options at expiration he talks alot about doing ratio trades where several of your positions are naked.

If you read some of Jeff Augen's articles on SFO mag he has also indicated the volatility trades that are done here are not really effective anymore. However I think this group would disagree. These option pre-earnings IV trade concepts appear in Jeff's book on volatility BUT Kim has tuned those strategies to make them effective. I think Kim can give us alot of incite here.

Additionally Jeff does not account for trading costs which reduce profitability.

That being said I think the man is a genius and just understanding his line of thinking seems to be well worth reading his books. He is definitely one of my heroes

I think for some strategies, like the one he mentions above, it's the result of the market makers trying to get rid of another inefficiency (the large amount of time-decay that happens over the weekend). So for this strategy not to work, it would imply the existence of another inefficiency. I think that's why Augen likes this strategy. Also, your correct, commissions could be a big issue. I think TOS is negotiable down to .50 with no ticket (you would have to have a large account and trade a lot of volume to get this). IB has a standard .75, tradestation 1.00 with no ticket (but is also negotiable down to about .75).

[tjlocke99 18]

@chadk, first of all, I just wanted to say thank you...

For the second strategy, you do the reverse trade at 1pm EST and you're hoping that the stock moves in the final 3hours before close. Gamma is very high, so a slight move in the stock can be very profitable. I've experienced 70-80% returns while backtesting this strategy.

Augen seemed to have a fancy on AAPL, and referred to it as a index in its own right. I also don't think slippage would be a problem with an ATM butterfly on AAPL as its highly liquid. During the webinar, Augen used 5 point spaced strikes.

Regarding the 2nd trade, why not use a straddle, trade fewer contracts and thereby reduce your commission costs, reduce you bid/ask loss, AND not worry about being short potentially ITM contracts on a $600+ dollar stock! I know you all are fearless, but the mid short position is a -2 for each spread. If did 5 positions on the spread you are short 10 contracts (1000 shares worth) of AAPL a few hours before you can't trade it anymore! That sounds like a recipe for having your account cleaned up by some assignment and weird market event. What if you lose your Internet connection at Friday at 3 PM ET.

I do NOT think this is a beginner of even mid-level option trader strategy. This seems like its for the experts.

[dwilliams8649 4]

I have access to several tools with intraday option pricing (OptionVue included). (But I don't have a lot of time to invest.) Let's start with strategy #1. You said ATM, but what strike spacing? Last week, 9am CT, GOOG=642.55, a 635-640-645 call butterfly is only $0.65 and has $0.03 in comms (assuming $0.75/contract). That's 4.6% in, and 4.6% out. You need to make 9.2% just to cover comms. Then let's talk about slippage. The market is closed right now, so I can't see how wide the market is, but assuming it's somewhat tight, but you have to cave in a nickel to get filled to get in. Well, that nickel is another 7.7%. Now you need to make 16.9% just to break even, assuming no slippage to get out.

Taking this GOOG example from Aug 9th, in one hour (after 9am CT), this trade is down 25%. End of day -11%.

Friday:

8:30am CT: -18%

9:30 +9%

10:30 -14%

11:30 0%

12:30 13%

13:30 2%

14:30 9%

EOD 9%

You don't even want to know about Monday. Started -17%, and proceeded to -93% at EOD, without adjustments.

Also, from what I know, OptionVue gives 30m historical data. TOS OnDemand is supposed to be tick-level data... So I will check by 30m intervals on TOS OnDemand and compare to your results. If they line-up, as I mentioned there were price spikes of 30%, it would valid some of this backtesting.

[tjlocke99 18]

Also, from what I know, OptionVue gives 30m historical data. TOS OnDemand is supposed to be tick-level data... So I will check by 30m intervals on TOS OnDemand and compare to your results. If they line-up, as I mentioned there were price spikes of 30%, it would valid some of this backtesting.

Is this backtesting assuming you could enter at the mid? That could be tough and losing $.05 or so on the bid/ask on both ends of the trade would not help profitability either.

Good discussion everyone. Thanks.

[tjlocke99 18]

Could anyone tell me how we could get a list of all underlyings with liquid options?

Thanks!

Richard

[dwilliams8649 4]

Is this backtesting assuming you could enter at the mid? That could be tough and losing $.05 or so on the bid/ask on both ends of the trade would not help profitability either.

Good discussion everyone. Thanks.

Well, TOS OnDemand uses an algorithm based on actual fill prices at that particular point in history, so for less liquid stocks, it's near impossible to get a fill at the mid, even while backtesting... However, for AAPL, the majority of the fills were at the mid, some were executed right away, some took a minute or so to get filled.

[Kim 7,943]

I did the first strategy last year with SPY, doing 4 point fly. The results have been overly positive - at some point I thought I found a holy grail. I always started on Thursday. In some weeks the gain was 70-80%. Of course that changed in August when I had a 70% loss.

The problem here is the general problem with weeklies - when the underlying cooperates, the results are very impressive. When it doesn't, the negative gamma will cause significant loss.

Now, I held till the mid of the next week (usually Wednesday) and aimed for high return (at least 30-40%). Maybe the correct way to do it is to hold for less and aim for lower return. But then again, you can have few 10-15% gains and then there is a large move, you have 50-60% loss that erases all the gains.

Can we use stop losses? Yes. But I believe we will be stopped too many times if there is a decent move on Friday. And if we let for say 10-15% loss, on Monday it can easily become 40-50% loss.

I also believe that this strategy is suitable more for indexes and less for stocks, especially stocks like AAPL.

[dwilliams8649 4]

I did the first strategy last year with SPY, doing 4 point fly. The results have been overly positive - at some point I thought I found a holy grail. I always started on Thursday. In some weeks the gain was 70-80%. Of course that changed in August when I had a 70% loss.

The problem here is the general problem with weeklies - when the underlying cooperates, the results are very impressive. When it doesn't, the negative gamma will cause significant loss.

Now, I held till the mid of the next week (usually Wednesday) and aimed for high return (at least 30-40%). Maybe the correct way to do it is to hold for less and aim for lower return. But then again, you can have few 10-15% gains and then there is a large move, you have 50-60% loss that erases all the gains.

Can we use stop losses? Yes. But I believe we will be stopped too many times if there is a decent move on Friday. And if we let for say 10-15% loss, on Monday it can easily become 40-50% loss.

I also believe that this strategy is suitable more for indexes and less for stocks, especially stocks like AAPL.

Thanks Kim... the problem with backtesting is that we will include days that, under normal circumstances, we would skip. Augen mentioned that in his webinar. "If there is some large economic event pending, then enter the trade on Friday." I am curious what would happen if you entered the trade on a Friday morning, instead of Thursday, on the trade(s) that you faced a major loss,.

[cwerdna 12]

Also, your correct, commissions could be a big issue. I think TOS is negotiable down to .50 with no ticket (you would have to have a large account and trade a lot of volume to get this). IB has a standard .75...

I don't want to go OT, but can we discuss the above further at http://steadyoptions...__160#entry7243? The TOS rate you list sounds too good to be true. I'd probably close my IB account if I could swing that good a deal on TOS. I like TOS a lot better.

As for IB...well, $0.70 is the standard, but what I'm charged is all over the place... It still seems to average <$1 for commissions though. The things I don't like at IB are the stupid cancel/modify fees and how execution credit supposedly is only applied for cancels/modifies same day. Thus, I'm pretty leery of canceling/modifying my non-spread orders. It's ridiculous that the cancel/modify fee is greater than what they charge for a trade the goes thru.

Edited August 17, 2012 by cwerdna

[ChadK 25]

Also, from what I know, OptionVue gives 30m historical data. TOS OnDemand is supposed to be tick-level data... So I will check by 30m intervals on TOS OnDemand and compare to your results. If they line-up, as I mentioned there were price spikes of 30%, it would valid some of this backtesting.

The backtesting I provided here was not using OptionVue data, but rather another program has data for every 5 minutes. See the picture I provided earlier. It's neat to see what the P&L was for every 5 minutes through the course of the day.

[ChadK 25]

I did the first strategy last year with SPY, doing 4 point fly. The results have been overly positive - at some point I thought I found a holy grail. I always started on Thursday. In some weeks the gain was 70-80%. Of course that changed in August when I had a 70% loss.

I was hoping you'd chime in. Just so people understand, you were doing this live. This wasn't a backtest. Personally, I don't like any trade that has an occasional 50% loss, or even, gasp, 70% loss.

[Kim 7,943]

I was hoping you'd chime in. Just so people understand, you were doing this live. This wasn't a backtest. Personally, I don't like any trade that has an occasional 50% loss, or even, gasp, 70% loss.

Just to clarify - those big losses could be avoided. The trade could be closed for 15-20% loss. But then again, where do you put the line? Where do you set the stop loss so on one hand you are not stopped out too often, and on the other hand, you avoid the big losses?

[Marco 223]

I did the first strategy last year with SPY, doing 4 point fly. The results have been overly positive - at some point I thought I found a holy grail. I always started on Thursday. In some weeks the gain was 70-80%. Of course that changed in August when I had a 70% loss.

The problem here is the general problem with weeklies - when the underlying cooperates, the results are very impressive. When it doesn't, the negative gamma will cause significant loss.

Now, I held till the mid of the next week (usually Wednesday) and aimed for high return (at least 30-40%). Maybe the correct way to do it is to hold for less and aim for lower return. But then again, you can have few 10-15% gains and then there is a large move, you have 50-60% loss that erases all the gains.

Can we use stop losses? Yes. But I believe we will be stopped too many times if there is a decent move on Friday. And if we let for say 10-15% loss, on Monday it can easily become 40-50% loss.

I also believe that this strategy is suitable more for indexes and less for stocks, especially stocks like AAPL.

what made you stop it altogether? I can see why you dropped the strategy in Aug11 but did you never tried it again when things calmed down?

[ChadK 25]

what made you stop it altogether? I can see why you dropped the strategy in Aug11 but did you never tried it again when things calmed down?

Because he's been concentrating on earnings plays?

Here's a question for you...well, a couple. 1) How do you know when to start back up again? (How do you know when the storm has passed? Sometimes it's not as obvious as a storm. 2) How do you know when to quit before the system breaks again?

I can't speak for Kim, but sometimes, when getting burned by the stove, you stop touching it to see if it's still hot. (ie. you walk away from a trade and not consider doing it again. If it broke once, it can break again, especially when you least expect it.)

[dwilliams8649 4]

If we are trading this on the S&P during a time period filled with 2-3 one-day standard deviation moves and market gap ups/downs of 3-4%, we probably wouldn't experience the ideal result. In such a backdrop, we might need to change the underlying or wait for a better market environment. AAPL during that time, would've been a much safer bet (and would've been profitable). There is no real mechanic strategy that is going to work every time, we must be willing to make adjustments based on the current backdrop/environment.

For every 10 trades, if it fails once, well... let's assume that average profit is 40% and every loss is 70%, that's still 29% (non compounded).

And from backtesting, it's more better than 10:1... So I think there is still hope. Also I don't think Augen would feed us all the information, but rather, give us a starting point.

[fieldydwb 31]

@DW agreed. It's worth more testing. Kim said it himself, in some weeks he did 70-80% and one week he got burned 70%. The inbetweens and the occasional extra 70% could make it worth it.

[Kim 7,943]

I think that the exit strategy is crucial (well, isn't it true for every strategy?) Do we aim for 50-60% gain, risking to lose the 30% we already have? Where do we set the stop loss?

I agree it is worth further testing.

[cwelsh 1,549]

I suggest we divide up on several different stocks and paper trade for four weeks. The most liquid, and more volatile stocks, which seem to be possible to use are (used my screener from my other strategy). Any of these COULD work:

AAPL

AMZN

CSTR

EOG

GOOG

GLD

LNKD

LULU

MA (slippage may be too high here)

MNST

NFLX

PCLN

SINA

VMW

YELP

I would like to see people reply, use the quote feature, and put your name next to the one's you'll monitor for the next four weeks. So for instance:

AAPL -- Chirs

AMZN

CSTR

EOG

GOOG

GLD -- Chris

LNKD -- Chris

LULU

MA (slippage may be too high here)

MNST

NFLX

PCLN

SINA

VMW

YELP

Don't sign up for more than 3 or 4, that would get hard to monitor since you're going to have to watch INTRA day prices. Ideally, I'd like to see two members sign up for each one. If everyone will shoot me a private message through messanger on Friday with the results, I'll post them the next week (that way we wont have one hundred postings of results). I'll start a thread with the results.

In backtesting, this seems very promising, but I want to test it for at least four weeks before I stick any real money to it.

O, one more comment, yes that JA article (spot the sale) is quite similar to what I do on my SD trades, though I tend to use OTM RICs, and he seems to use ATM straddles -- but it's essentially the same thing.

If you want to particapte in tracking this strategy, just cut and past the MOST RECENT cut and pasted stock list with which ones you'll help cover. We'd start tracking next Thursday morning.

Edited August 17, 2012 by cwelsh

[tjlocke99 18]

Again, using TOS OnDemand, I found that the trade did work as advertised. For my purposes, however, if the trade wasn't profitable after 1 hour, I would do an adjustment by selling another butterfly in the strike right below (upward trending market) or right above (downward trending market) the middle strike of the currently held short butterfly. This reduced my overall exposure and made it easier to profit in the currently trending direction.

Well, that's it... The whole process seemed to good to be true, so I am not sure if there is something wrong with the way TOS OnDemand works in these cases, or if the strategy is really this profitable. However, according to Augen, it's supposed to be. Kim (and forum members) please give your commentary, and test this out as well if you can. The only thing that troubled me slightly during the webinar is that when Augen said that he completely gave up on trying to predict the direction of the market and that doing so is a fools game. He would much prefer to hold cash, and trade such strategies (anomalies) when they appear. However, he did talk briefly at one point about some of his indicators (I am assuming the ones that he built) that his subscribers use to predict the bottoms and tops (basically, the direction) of the market or a particular stock.

-DW

DW,

What company is Jeff selling his advisory services out of now?

Thanks.

Richard

[Guest DShaver]

Chris,

I'd be glad to try this out with you. I'll take LULU and YELP. So you want me to message you with the results next friday after doing the trading Thursday and/or Friday correct?

AAPL -- Chirs

AMZN

CSTR

EOG

GOOG

GLD -- Chris

LNKD -- Chris

LULU -- Donald

MA (slippage may be too high here)

MNST

NFLX

PCLN

SINA

VMW

YELP--Donald

[Kim 7,943]

Chris, just to clarify - which strategy you are talking about? The first one (long fly) where you buy on Thursday and want the stock to stay still? Or the second one (short fly for 3 hours Friday testing)?

[Guest DShaver]

I figured we could probably do both since one starts thursday morning ends friday morning (usually) and the other is a Friday afternoon trade. As I understand it at least. And if we're in the thursday trade but don't get out Friday morning then we just skip the Friday afternoon trade on that one.

[cwelsh 1,549]

I was going to do both, but I am MOST interested in the first one, buying Thursday morning -- my initial backtesting shows that stands the best chance of working. I'd like 10-12 people working on this (ideally), but it can be succesful with just 4 -- that would give us at least 10 stocks over a 4 week period, which would be a good platform to start from.

[Kim 7,943]

I agree. The second one requires too much monitoring, timing etc.

Why didn't you include SPY?

[cwelsh 1,549]

I agree. The second one requires too much monitoring, timing etc.

Why didn't you include SPY?

It's not volatile enough