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2 minutes ago, RapperT said:

you have to take this quote in context of what John was saying about the weekly nature of adjusting positions.  All he was saying is that we factor historical vol when deciding what our allocation to a particular option should be be in a new week.  The deltas of the trades will often change from week to week to fit our model portfolio risk profile.

It is good to hear that you will be adjusting the trades based on historical vol. as well as the current port. risk factors.   

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On 12/9/2018 at 5:58 AM, RapperT said:

The system runs every Thursday night and generates a signal before market open on Friday. I close all open trades and open new trades on Friday morning. This allows me to reduce risk on commodities that have been trending favorably as needed (in some cases add risk back on) and add risk for those commodities that lost money over the previous week. This means that the risk control for the portfolio is under far more control than a blind trend following strategy. While I check the trades through the week (I get curious) I do not modify open trades. No adjustments, no taking profits. The trade runs until the following Friday.

Does it mean it is quite mechanical trading as opposed to SO option strategies trading where you need to evaluate each trade or try finding new trades ? Do you take all trades every Friday morning and close next Friday ?. Are members able to identify new setups like in options trading or only trade what is given out by the system ?

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1 hour ago, Manish71 said:

Does it mean it is quite mechanical trading as opposed to SO option strategies trading where you need to evaluate each trade or try finding new trades ? Do you take all trades every Friday morning and close next Friday ?. Are members able to identify new setups like in options trading or only trade what is given out by the system ?

The system is 100% mechanical.  We are always working on improving the model but that effort is carried out over time.  When a change needs to be made we make the change to the model, we don't take discretionary trades. 

 

 

It is really important to take every trade in the model every week to get good results.  We never know when an underlying will start trending.  For example, oil lost money every week for several weeks in a row and then became a huge winner for us over the last 6 weeks or so. 

 

 

We're trading options on futures contracts not the futures themselves.

 

 

In terms of people identifying setups that would be outside of what we're doing.  Our system is fitting a specific type of timeseries model every week to the underlying future and using that to generate an "Up" or "Down" signal for the following week.  There isn't really a setup.

Edited by Jjapp

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2 minutes ago, gowthamn said:

@RapperT

What strategy will be used? Naked, spreads, fly? I assume it will depend on the signal generated.

long options.  letting winners run is a big part of TF.  We dont want to utilize spreads that will limit profit potential on winners.  That may help win rate but would almost certainly hurt overall expectancy of the system.

We arent that concerned with win rate...just as it relates to average winner versus average loser

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1 minute ago, RapperT said:

long options.  letting winners run is a big part of TF.  We dont want to utilize spreads that will limit profit potential on winners.  That may help win rate but would almost certainly hurt overall expectancy of the system.

We arent that concerned with win rate...just as it relates to average winner versus average loser

Understood. Thanks.

Edited by gowthamn

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Here's my question.  @Kim really sells this service as educational.  I've seen the benefit of this and have learned a ton over my time here.  There are numerous strategies that I have learned about, their benefits and risks, and when to use them.  All trades have the recommendation to do your own research, which allows many to get better fills than the official trades and allows many of us to figure out new trades on our own. 

 

This system seems like a black box service where you send out the trade recommendations and we're supposed to blindly follow them.  There seems to be a lot of coding and scanning to get these trades.

 

Are we going to be able to "learn" the system so that we can figure similar trades out on our own?

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6 minutes ago, RapperT said:

straight puts and calls.  Everything minus the actual placing of trades is automated.  We will likely have the signals auto post to the trade topics as well (down the road a bit)

Why not ratio spreads? Or why not ITM options? Wouldn’t that put the risk/reward for a trend trading system in your favour? Or at least reduce drawdowns. 

 

I guess the answer is, you don’t know unless you backtest the results with these various option strategies over extended period. 

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10 minutes ago, Anderson317 said:

Here's my question.  @Kim really sells this service as educational.  I've seen the benefit of this and have learned a ton over my time here.  There are numerous strategies that I have learned about, their benefits and risks, and when to use them.  All trades have the recommendation to do your own research, which allows many to get better fills than the official trades and allows many of us to figure out new trades on our own. 

 

This system seems like a black box service where you send out the trade recommendations and we're supposed to blindly follow them.  There seems to be a lot of coding and scanning to get these trades.

 

Are we going to be able to "learn" the system so that we can figure similar trades out on our own?

We explained in detail how we were generating the signals in the first post.  I'd recommend going back and reading that.  There is nothing black box about an ARIMA model.  Here is the wikipedia article on it:  https://en.wikipedia.org/wiki/Autoregressive_integrated_moving_average

There is enough in that wikipedia article and online that you should be able to generate your own model that replicates what we're doing relatively closely. 

The code was written to increase efficiency.  We're fitting three different parameters over multiple contracts.  Doing that manually would take hours and seems a bit silly when code can do it for us quickly.  The code also allows us to improve the model over time as we learn more.

My view is that this can save you some time but some people like building these models (I'm one of them) so I totally get it if you would rather do it yourself. 

 

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This is a directional, trend following approach. Not an "options strategy" approach.

The cleanest way to go about this would be to use the underlying but, with futures the margin costs would be very high, and even more important, there is a degree of open ended risk.

So, you would want to get as close as is possible to mimicking the underlying, and you definitely do not want to have any "greeks", especially IV movements, getting in the way of maintaining the "purity" of the trades.

You just want to isolate "delta", and have that working for you, along with the benefits of positive gamma that goes along with being "long" options.

If you start with a 50 delta call, and catch onto a trend, eventually you will be holding an 80+ delta option.

 

This also magnifies the process of scaling out of profits as you ride the trend.

It is also beneficial the other way around...on losing trades you become less long (or short) as price moves against you.

 

You definitely do not want to complicate this process with various option strategies....

This is not the venue for that.....it seems to me.

 

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in addition to JJapp comments, here are other educational opportunities not currently offered in SO strategies;

  • Trendfollowing as a strategy
  • trading options on futures
  • Systematic versus discretionary models
  • overview of other great trendfollowers and links to their resources/articles/systems.
  • and more as we evolve

I encourage everyone to read the system description already posted and the TF FAQ thread.  We also published a schedule of additional educational topics that will be coming out over the coming weeks.

 

 

Many of you will easily be able to create your own systems, likely very soon.  This will increases your overall trading knowledge base while allowing you to diversify from equity market based strategies.  TF is another valuable tool and an understanding of its basic tenets as well as various systems will simply make you a better trader, period.

 

 

Edited by RapperT

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20 minutes ago, cuegis said:

This is a directional, trend following approach. Not an "options strategy" approach.

The cleanest way to go about this would be to use the underlying but, with futures the margin costs would be very high, and even more important, there is a degree of open ended risk.

So, you would want to get as close as is possible to mimicking the underlying, and you definitely do not want to have any "greeks", especially IV movements, getting in the way of maintaining the "purity" of the trades.

You just want to isolate "delta", and have that working for you, along with the benefits of positive gamma that goes along with being "long" options.

If you start with a 50 delta call, and catch onto a trend, eventually you will be holding an 80+ delta option.

 

This also magnifies the process of scaling out of profits as you ride the trend.

It is also beneficial the other way around...on losing trades you become less long (or short) as price moves against you.

 

You definitely do not want to complicate this process with various option strategies....

This is not the venue for that.....it seems to me.

 

But trend following is a strategy used to essentially capture directional persistence. So all sorts of directional option trades would IMO be applicable.

 

Given that trend following systems also have stop losses for risk management and to help reduce drawdowns, to me it seems like ratio backspreads could be a good idea. 

 

But like I said before, the only true answer to this is a backtest. 

 

Edited by candreouTrade

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1 hour ago, candreouTrade said:

But trend following is a strategy used to essentially capture directional persistence. So all sorts of directional option trades would IMO be applicable.

 

Given that trend following systems also have stop losses for risk management and to help reduce drawdowns, to me it seems like ratio backspreads could be a good idea. 

 

But like I said before, the only true answer to this is a backtest. 

 

I understand what you are saying but I think , until one gets accustomed to this process and understands how it all works, it would probably be a good idea to keep the process clean and only have pure delta exposure without having the other greeks get in the way.

 

Once you have spent more time with all of it and have a better feel for how it works, then that might be a better time to try making some option adjustments.

But to really see how this thing works it's probably a good idea to stay as close to the basic idea as possible....at least at first.

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50 minutes ago, gowthamn said:

So the past performance is 70% average profit and 40% average loss? What is the win rate?

48% win rate, avg winner 68% and average loser 40% as of two weeks ago but last week we were 4-4 (unusual and lucky).  We will be posting updated full system stats soon.  Lots to get published.

Edited by RapperT

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7 minutes ago, RapperT said:

ok all trades are posted...took longer than i thought with all the copying and pasting but if you trade it later today just use the deltas in the trade alert thread and you'll be fine (even if the strikes differ a bit from mine).

Can you please explain:

 

Corn (ZC):

Bought 1 Feb19/March 19 395 call for a debit of 9 and 1/8.

 

Total cost before commission of $456.25

 

Do you purchase 25 delta or 50 delta what you have in the table ? What does 1Feb19/March 19 mean ? Two expiry dates ?

 

Sorry, but never traded commodities before.

 

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Update on system testing through 12/21/2018

We've been testing this system live in our own accounts since the beginning of August. I closed this week's trades this morning and thought I would send out an update. All trade stats are based on real trades. The capital at risk varies as I messed around with position sizing in the first few weeks and added more underlying futures to the system. This isn't any sort of recommendation or promise of future performance. This is just the stats from our first 4 months or so of our trading/testing the system. One other call out. Oil took a 25% crash in the last month. Our system caught that crash which is great (it is what the whole system is designed to do). But this also highlights the nature of trend following. We could be treading water or even losing slightly every week until the next contract starts to trend. The returns will not be smooth! If you look at our return stream below you'll see we were flat to slightly down 10 weeks into trading the system. Please keep this in mind. The last month was one of the really good times to be a trend follower. There will be really bad times. Returns will be inconsistent from week to week and month to month.

Underlying Contracts in the System:

  • Oil
  • Gold
  • Corn
  • Sugar
  • Coffee
  • Lean Hogs

*Goal is to get to at least 10 underlying contracts for diversification. We'll continue to add contracts.

High Level Stats:

  • Wins: 28
  • Losses: 25
  • Average Win: 60%
  • Average Loss: 38%

Returns on a notional 50K

We sized our trades during the test on a 50K portfolio. Here are the results by week:

 

image.png

***Sorry for all the edits.  Trying to get  markdown to format correctly.

 

Edited by Jjapp
Markdown formatting

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great question!  For SO members, Im trading the 25k deltas.  John will trade the 50k deltas separately.  After the new year we will likely open one account just for this system together and trade it off the 25k allocation.

 

So with the Feb19/March19 alert:  That means we bought one option expiring in Feb that settles on the March 19th futures contract.  Remember, unlike equity options, these options do not give us the right to buy or sell the underlying commodity...just the FUTURES contract on the commodity.  That's why there are two expiry.

Edited by RapperT

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16 minutes ago, Manish71 said:

Can you please explain:

 

Corn (ZC):

Bought 1 Feb19/March 19 395 call for a debit of 9 and 1/8.

 

Total cost before commission of $456.25

 

Do you purchase 25 delta or 50 delta what you have in the table ? What does 1Feb19/March 19 mean ? Two expiry dates ?

 

Sorry, but never traded commodities before.

 

Many commodity futures options expire in the month prior to their name.

For example ,...March Sugar options expire on Feb 15th.....Feb Sugar expires Jan 15 etc......

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13 minutes ago, Manish71 said:

BUY +1 /ZCH19:XCBT @377.75 LMT

 

I am not doing something correct. In ToS, it is showing 377.75 as price for ZC March 19 call.

377.75 is the price for corn futures contact for March. Trade is for Feb options - I cannot figure out the Feb options trade-3.95 strike last trade at $2.375

Edited by sroast
incorrect price

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Guys ill be back in front of my laptop soon.

 

if prices have moved since my trades ( some have), just use the deltas in the OP of  the trade alert.   You don’t have to trade the same strike.  I will double check everything soon and answer all questions 

Edited by RapperT

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4 minutes ago, RapperT said:

Nearly all of these have moved against us initially ( no big deal.. volatile system).  If you match the deltas you’ll did better than I did in most cases 

I'll second this.  This is why we posted all the signals and target deltas first thing before we even opened our trades.  The delta and the direction is the most important piece.  Focus on buying the right delta. 

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I believe that @Jjapp stated that he converts everything to dollars in his script, and these are quotes in cents...

 

 

RapperT To help people new to these future trades, could you explain  the following regarding the opening trade posts.   For 4 out of the 6 trades, the dollar amount  equaled the price multiplied by multiplier amount listed in the table in the first post of this thread.   For 2 of them (sugar and coffee) this math did not work.

  • For one contract of sugar to cost $672 at a price of 0.0060 implies a multiplier of 112000 (1120 is in the table).
  • For one contract of coffee to cost $622.50 at a cost of 0.0166 implies a multiplier of 37500 (375 in the table).

 

Both of these of off by 100x the multiplier in the table.    Is the table multiplier incorrect?   Or is there some other thing that factors into the sugar and coffee price, but not the others?

 

 

Edited by NJ_KenRob

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9 hours ago, Manish71 said:

You can use this TF strategy for any underlying. So is the reason you chose to use this for commodities options on futures that it is not correlated to S&P and thus will give you more diversification ?

 

Thanks.

We tried to choose contracts not correlated with each other.  We didn't really  think too much about the S&P.

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45 minutes ago, Jjapp said:

We tried to choose contracts not correlated with each other.  We didn't really  think too much about the S&P.

I meant why trade the TF strategy on commodities and not on lets say the S&P, Nasdaq or the Russell ? It should work on those too. So commodities trading is to diversify your risk from equities. The TF strategy is just a way to do it. Right ?

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29 minutes ago, Manish71 said:

I meant why trade the TF strategy on commodities and not on lets say the S&P, Nasdaq or the Russell ? It should work on those too. So commodities trading is to diversify your risk from equities. The TF strategy is just a way to do it. Right ?

Sure.  You can do trend following on an index.

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1 hour ago, Jjapp said:

Sure.  You can do trend following on an index.

Yes, so the reason you are doing it on commodities is not to have any correlation with equities ?

 

Are there any studies done on ROI of the TF strategy done on equities vs. commodities ?

 

Thanks.

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4 hours ago, Manish71 said:

Yes, so the reason you are doing it on commodities is not to have any correlation with equities ?

 

Are there any studies done on ROI of the TF strategy done on equities vs. commodities ?

 

Thanks.

No.  We are doing it on commodities because their time series often demonstrate high autocorrellation. 

 

The returns to trend following tend to be uncorrelated with buying and holding the SPY.  

 

I haven't looked for studies on trading these systems on various underlying instruments. 

Edited by Jjapp

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57 minutes ago, Jjapp said:

No.  We are doing it on commodities because their time series often demonstrate high autocorrellation. 

Can you please explain the above statement ? High autocorrellation ?

 

Thanks for your patience.

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Autocorrellation is when the values in a time series are correlated with their previous values.

In general you want to add as many assets as possible to a trend system for diversification.   Stocks are a legitimate asset to add.  

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12 minutes ago, Jjapp said:

Autocorrellation is when the values in a time series are correlated with their previous values.

In general you want to add as many assets as possible to a trend system for diversification.   Stocks are a legitimate asset to add.  

some trendfollowers are literally in hundreds of different assets.  But the auto correlation factor with commodities is the primary reason they are the most common asset class utilized in TF systems.

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8 hours ago, Manish71 said:

 

 

Are there any studies done on ROI of the TF strategy done on equities vs. commodities ?

 

Thanks.

Wes Gray is a really good follow, here he writes a bit on the topic:  https://alphaarchitect.com/2017/09/08/trend-following-valeriy-zakamulin-trading-various-financial-markets-part-8/

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