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Kim

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2 hours ago, ales19 said:

there shouldn't be any margin requirements if we are buying straight put/call options though. thing is I cant see if there are any options available on these BTC futures and what the commissions are as the IB platform seems to be down for maintenance and won't let me log in

For the futures when they first came out there were some crazy req.

 

i think we had a thread on the general board.  I forget all the details though 

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Well, I think the main question is what to do if you have a decent gain (book the gain and roll or wait till Friday). Looks to me that if the trade is little changed by Friday, there is no real benefit to close it and open a new one - unless of course the trend changed, or we are getting too close to expiration. If you target delta for example is 25, and the current trade has a delta of 30, there probably will be very small difference in "theoretical" returns if you roll or not - but practically it will save commissions and slippage. Those options seem very liquid, but we all know there always at least some slippage, even in SPY options. 

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27 minutes ago, Kim said:

Well, I think the main question is what to do if you have a decent gain (book the gain and roll or wait till Friday). Looks to me that if the trade is little changed by Friday, there is no real benefit to close it and open a new one - unless of course the trend changed, or we are getting too close to expiration. If you target delta for example is 25, and the current trade has a delta of 30, there probably will be very small difference in "theoretical" returns if you roll or not - but practically it will save commissions and slippage. Those options seem very liquid, but we all know there always at least some slippage, even in SPY options. 

Yeah this point in particular  makes sense intuitively as I mentioned earlier ( I think it was your third rule.)

 

Dte will matter as you mentioned and vol could also impact our desired future exposure to an asset with an unchanged trend in occasional instances.  I would imagime it would have to be a case by case thing when we see what the new targeted delta is in week 2 as you also pointed. 

 

3 of us can chat about it.  But it defitnely warrants a closer look.

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Even at around 30’days out though we would notice at least a moderate increase in the volatility which does seem to be primary concern ( so far) for some of the posters in the thread. 

 

Edited by RapperT
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2 hours ago, RapperT said:

For the futures when they first came out there were some crazy req.

 

i think we had a thread on the general board.  I forget all the details though 

@ales19 with IB its 200k USD per CME contract

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here's an interesting chart which shows Bill Eckhardt's strategy's returns versus major benchmarks as well as the correlation co-efficient for each (-1 = perfect negative correlation, 0 = no correlation, 1 = perfect positive correlation.  This table is interesting for a few reasons, one of which being that one of ECT's core strategies is a 6 day system like ours which is pretty unusual.  He also runs a 12 day and 60 day (also short in relative terms).  Bill is considered one of the all time greats.

 

HIS SYSTEM'S COLLECTIVE WIN RATE AS OF A FEW YEARS AGO (DATING BACK TO 1991) = 33%

 

image.png

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5 minutes ago, Manish71 said:

@RapperT is the 33% return from trading commodities alone using TF ? What is his basked of commodities ?

its not a 33%.return.  His returns have consistently crushed major benchmarks.  His win rate is (was) 33%

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I just googled and this is what I got:  He branched out a bit from straight TF in 2012 per a recent article to include other strategies as there was no vol in markets.  Trades 72 markets 

 

https://thehedgefundjournal.com/eckhardt-trading-company/

 

https://whatheheckaboom.wordpress.com/2013/06/29/quotable-quotes-from-william-eckhardt-mechanical-trend-following-systems-trading/

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2 minutes ago, RapperT said:

its not a 33%.return.  His returns have consistently crushed major benchmarks.  His win rate is (was) 33%

ok. is it from trading commodities alone using TF ? What is his basket of commodities ?

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5 minutes ago, Manish71 said:

ok. is it from trading commodities alone using TF ? What is his basket of commodities ?

If he's trading 72 that's about all the liquid futures.

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On 12/19/2018 at 5:50 AM, Kim said:

Site like TastyTrade became very popular in the recent years. They are using those highly catchy reasons like "80% of the options expire worthless, so selling them gives you an edge.", "Options Selling has high probability of success (80-90% winning ratio)." etc.

But try to ask them for their track record, and they will use all kinds of excuses why they cannot provide it. Those who followed those guys can see what happens when you are short vega short gamma and volatility spikes. The last few weeks are the best example.

As @Jjapp mentioned, it doesn't mean you should not sell options at all. But having onlyoptions selling trades in your options portfolio is a certain path to ruin.

I know many tastytrade style followers will not agree with us, but the track record is the best proof. Numbers don't lie. Tastytrade has been trying to prove for years that buying premium before earnings doesn't work - and we are debunking their "research" time after time.

More details: 

Selling Options Premium: Myths Vs. Reality

 

I literally tried for years to get ANY kind of results from TastyTrade; I mean even one WEEK, not to mention long term results. They simply will not provide their results. Because there is zero transparency on results they could be teaching a method (selling vol when IV Rank is high) that is entirely a losing proposition for traders, but of course that would be an excellent proposition for their brokerage. Remember, the motto of every brokerage ever is to get the trader to "trade small, trade often." 

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On 12/27/2018 at 7:09 PM, RapperT said:

Respectfully,

these are exactly the kind of discretionary calls we avoid in a systematic approach.  Whipsaws are part of the game and, while frustrating, we know ( empirically ) that trying to adjusting positions ( outside the parameters of the system)  in between signals will hurt nearly every trend following strategy over time.

 

I would probably disagree with your assertion that the worst case scenario is that losers would be turned into breakevens.  That could be the case in many instances but the disparity between the average win and average loss is what makes this system and similar systems successfull.  Increasing win percentage at the the potential cost of decreasing the overall positive expectancy of the system may be good for our psyche in the short term but would not be good for performance in the long.

 

 

 

 

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21 minutes ago, MikeCl said:

I literally tried for years to get ANY kind of results from TastyTrade; I mean even one WEEK, not to mention long term results. They simply will not provide their results. Because there is zero transparency on results they could be teaching a method (selling vol when IV Rank is high) that is entirely a losing proposition for traders, but of course that would be an excellent proposition for their brokerage. Remember, the motto of every brokerage ever is to get the trader to "trade small, trade often." 

"trade small, trade often."  Holds true even for SO trades. Even when you are buying options, only over a large volume of trades will the probabilities play out in your favour. So that is kind of a correct advice.

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Just now, Manish71 said:

"trade small, trade often."  Holds true even for SO trades. Even when you are buying options, only over a large volume of trades will the probabilities play out in your favour. So that is kind of a correct advice.

I'm not knocking the advice, just the motivation for a brokerage spouting it.

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I only saw brief mention of the market data issue: is anyone aware of an option to get market data for the softs options other than shelling out the $120.75/month on IB (or similar amount on TOS)? I suppose if one is ready right when the trades are posted it would be unlikely the market moves so much that we'd be looking to use a different strike than the official trade.

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5 minutes ago, ex3y7s said:

I only saw brief mention of the market data issue: is anyone aware of an option to get market data for the softs options other than shelling out the $120.75/month on IB (or similar amount on TOS)? I suppose if one is ready right when the trades are posted it would be unlikely the market moves so much that we'd be looking to use a different strike than the official trade.

Someone had mentioned earlier that you can get live quotes free of charge on investing.com

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7 hours ago, Manish71 said:

Someone had mentioned earlier that you can get live quotes free of charge on investing.com

@ex3y7s I have to do some digging on this.  I saw futures quotes on investing.com but not the options ( but I only checked briefly ).  

We don’t expect those with smaller accounts to pay that much to get the ICE quotes 

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8 hours ago, Manish71 said:

ok. is it from trading commodities alone using TF ? What is his basket of commodities ?

Just a note:  the point there was to help everyone get on board with lower win rates that are the nature of TF system.  This guy has been successful since 1991, at certain points trading over 1B in his core strategies and was only winning 1/3 of his trades 

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7 minutes ago, RapperT said:

@ex3y7s I have to do some digging on this.  I saw futures quotes on investing.com but not the options ( but I only checked briefly ).  

We don’t expect those with smaller accounts to pay that much to get the ICE quotes 

Thanks--let us know what you find. I did a little more research and unfortunately I don't think any broker offers free realtime data on the ICE instruments. Apparently the price is $110 directly from ICE so that doesn't surprise me.

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1 minute ago, Manish71 said:

@RapperT, if we leave out the ICE commodities from TF trading, does it make a difference in the long term returns ?

Most likely ( for better or for worse) as it would almost certainly increase volatility.

 

@Jjapp and I can see if there are suitable alternatives to replace them with and if not I will find a solution for live quotes.

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3 minutes ago, RapperT said:

Most likely ( for better or for worse) as it would almost certainly increase volatility.

 

@Jjapp and I can see if there are suitable alternatives to replace them with and if not I will find a solution for live quotes.

ok. But besides the live quotes, some brokers like ToS also charge $110 per month to trade them. For many members here (atleast me) it is not easy to change brokers. I would rather leave out the ICE commodities and substitute with alternatives.

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8 hours ago, MikeCl said:

I'm not knocking the advice, just the motivation for a brokerage spouting it.

I would probably knock this advice, especially coming from a broker.  We ( steady futures and steady options ) both follow certain parameters for trade placement.  Sometimes @Kim will only place a handful of trades in a month if there are no candidates that set up well for his guidelines around various strategies.

 

some strategies place tens of thousands of trades a year, also fine when it fits their rules/approach.

 

but to say “trade small, trade often” as a general rule regardless of strategy is an arbitrary tenet and definitely does not improve the probability of positive outcomes over any reasonable time period. Look at how basically all larger scale short vol strategies fared  over a couple small periods in 2018.  Destroyed their entire year in many cases.

 

Selling small scale naked options or spreads is probably fine at high volume provided its not the ONLY thing you’re doing ( and TT does suggest only writing options last I checked but it’s been awhile) The problem is most end up levering up at some point and that’s where the trouble starts.  

Dont forget there is a magnitude factor when evaluating a problem/strategy probabalistically.  If you win 90% of the time but that 10% can wipe out your account ....

  

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17 minutes ago, Manish71 said:

ok. But besides the live quotes, some brokers like ToS also charge $110 per month to trade them. For many members here (atleast me) it is not easy to change brokers. I would rather leave out the ICE commodities and substitute with alternatives.

Really you can’t even get delayed quotes and place trades?  Wow TOS is really terrible now.  I would just move to IB despite their antiquated UI.

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9 minutes ago, RapperT said:

Really you can’t even get delayed quotes and place trades?  Wow TOS is really terrible now.  I would just move to IB despite their antiquated UI.

Yes. They charge $110 to place any ICE trades. Plus one other SO member just found out that they allow only futures trading for lean hogs, not options.

 

The thing is I really love ToS because of the platform and the commission structure for options I have ($0.50 per contract with no base fee).

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Just now, Manish71 said:

Yes. They charge $110 to place any ICE trades. Plus one other SO member just found out that they allow only futures trading for lean hogs, not options.

 

The thing is I really love ToS because of the platform and the commission structure for options I have ($0.50 per contract with no base fee).

Keep it for your Ira or paper trading so you can use the tools when trading on IB

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In [5]:
import matplotlib.pyplot as plt
import numpy as np

import math
%matplotlib inline

import plotly.plotly as py
import plotly.graph_objs as go

The Sharpe Ratio and Diversification

We've been throwing out a lot of terms in the last few days and I thought it might be helpful to break them down in a little more detail. Most have to do with the idea of the sharpe ratio. What is the sharpe ratio? It is really the expected average returns of a system (over the risk free rate) divided by how wide the range of those returns are. Usually people call the denominator "risk" but I find that can sometimes make it sound more complicated than it is. For example, imagine I had two trading systems. The first has an average return of 5% and 68% of all returns are within -15% to 25% while a second system has an average return of 5% with 68% of all returns within -5% to 15%. What would this look like and which system is better?

In [18]:
#generate trading system one returns:

t1=np.random.normal(loc=0.05, scale =0.20, size=(1000))

#generate trading system two returns
t2=np.random.normal(loc=0.05, scale=0.10, size=(1000))

Now we'll plot both distributions so you can see what they look like.

In [19]:
trace1=go.Histogram(x=t1, opacity=0.75)
trace2=go.Histogram(x=t2, opacity=0.75)

data=[trace1, trace2]

layout = go.Layout(
    title='Comparing Trading Systems',
    xaxis=dict(
        title='Percent Return'
    ),
    yaxis=dict(
        title='Count'
    ),
    bargap=0.2,
    bargroupgap=0.1
)
fig = go.Figure(data=data, layout=layout)
py.iplot(fig, filename='basic histogram')
Out[19]:

We can see that both trading systems have the same average return but the returns from the second system (in orange) is clearly more predictable. This is what the sharpe ratio is trying to show. How predictable is your trading system. Theoretically, the more predictable the system results the more risk you can take (you should have fewer losing streaks). To show this we'll print the sharpe for both these systems.

In [20]:
sharpe1=0.05/0.20
sharpe2=0.05/0.10

print ("Sharpe for trading system 1: "+str(sharpe1) +" and "+ "Sharpe for trading system 2: " + str(sharpe2))
Sharpe for trading system 1: 0.25 and Sharpe for trading system 2: 0.5

So the two trading systems have a sharpe of 0.25 and 0.5 respectively. What happens when we combine both systems into one larger system? We know these systems have a correlation of 0 (I'll get to that in a minute) and calculating the sum of two uncorrelated distributions is easy.

In [22]:
total_sharpe = 0.1/math.sqrt(0.20**2+0.10**2)
print ("Combined systems sharpe = ", total_sharpe)
Combined systems sharpe =  0.4472135954999579

Now let's imagine we have two more systems that have the same exact characteristic return streams as the first two and calculate their sharpe. Again, we know each system is uncorrelated.

In [26]:
new_sharpe=0.2/math.sqrt(0.2**2+0.2**2+0.1**2+0.1**2)
print ('The new sharpe ratio is ' , new_sharpe)
The new sharpe ratio is  0.6324555320336758

Why we diversify

Hopefully this illustrates the power of diversification. As we add new returns streams to the overall system our sharpe increases with each uncorrelated system. This is why we want as many underlying instruments as possible in the overall system.

How do we know these distributions are uncorrelated?

Short answer is because I randomly generated the distributions so I know they have to be uncorrelated. But this brings up another question. How do you calculate portfolio sharpe if the systems do have some correlation? I'll show that in the future if people think this was helpful.

Edited by Jjapp

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6 hours ago, Manish71 said:

Just curious if hedge funds like these also invest in commodities to get these kind of returns last year:

 

https://finance.yahoo.com/news/bridgewater-apos-pure-alpha-fund-230000726.html

If you are interested in Dalio, I would recommend reading his book "Principles: Life and Work." The first chapter is about his path to success - also mentioning his experience with commodities. He started with commodities and extended his expertise to bonds and currencies.

This book is about his decision framework (I haven't completed the book yet), though. This or next year he will publish a book about his investing career/style.

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We've been harping on the importance of taking every trade every week, here are some interesting quotes from Bill Eckhardt (again) on the topic:

 

 

You Are Finished If You Keep Missing Good Trades

 

  • I take the point of view that missing an important trade is a much more serious error than making a bad trade.
  • If you make a bad trade and you have money management you are really not in much trouble. However, if you miss a good trade there is nowhere to turn. If you miss good trades with any regularity you’re finished.
  • For example, let’s say the market moves rapidly through your buying zone and you miss it, you miss your buy signal and instead wait for a retracement to maybe buy cheaper. But, the market just keeps going higher and higher and never retraces. Now what do you do? There’s a great temptation to reason that now it’s too high to buy. If you buy it now you’ll have an initiation price that’s too high? No, the initiation price simply won’t have the kind of significance you suppose it will have after the trade is made. You can’t miss these trades.
  • If you miss a good trade, you have nothing to protect you-that is, nothing in the system will assure that you eventually get in. Also, missing a good trade can be demoralizing and destabilizing, especially if you’ve been in the midst of a losing period. And like so many bad trading decisions, it ends up costing you more than just the money lost or not made on the trade. Missing a major trade tends to have a reverberating effect throughout your whole trading strategy. Sometimes it can be weeks before you get back on track.
  • Trading systems force discipline to make sure these trades are not missed.

 

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John W. Henry's (now owner of Boston Red Sox) primary fund show a 49% annualized return over ten year.  However, if an investor missed only the 5 most successful months out of that ten years, the return dropped to 28%

 

The discipline to stick with the game and be in the when those out sized wins eventually occur is what separates the good traders from the bad

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First off thanks for taking the time to introduce the system. There's been very little reference as to how the contract month is chosen. There was an unanswered post back on the 29th and once or twice I believe you mentioned as long as the option is more than 37 days out.  With so many future contracts not to mention those with serial options is it possible on at least Thursday night 2 mention the furures contract months looking to trade that way one could put together a watchlist organizing those contracts and when the trades come out Simply search for the proper option against that contract?

Lost a lot of money slowly but surely in the late 90s before the major Trends took off in Commodities buying deep out-of-the-money options based on some guidance from a man in a cowboy hat who called it the greatest business on earth.😉

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I will also start with the system. I do not have so much experience with Futures. Do we close the trades on Thursday and open on Friday? What are the best schedule for re-balancing? Does the future options have different opening and closing hours?

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It was a tough week for the system as almost every trend we were in reversed.  In fact, this week is the worst we've had since we started testing in August.  That being said, our risk control/position sizing worked even with strong moves against us in Oil and Sugar.  Performance stats are here:

 

 

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3 hours ago, mustafaoe said:

I will also start with the system. I do not have so much experience with Futures. Do we close the trades on Thursday and open on Friday? What are the best schedule for re-balancing? Does the future options have different opening and closing hours?

I think we answered those questions here:

 

In the discussion threads for each future we're trading we have all the information on contract size and trading hours.

 

 

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9 hours ago, lrfsdad said:

.  With so many future contracts not to mention those with serial options is it possible on at least Thursday night 2 mention the furures contract months looking to trade that way one could put together a watchlist organizing those contracts and when the trades come out Simply search for the proper option against that contract?

I'm not sure if you use IB but if so the way I've been setting it up is getting a tab for each contract we're trading in option trader and then collapse all the options expiration dates that don't meet our criteria (nearest expiration with at least 37 days to go).  You shouldn't need to worry about the specific future's expiration. 

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19 hours ago, mustafaoe said:

Do we close the trades on Thursday and open on Friday? What are the best schedule for re-balancing?

The new batch of signals come out every Friday between 8:30-11:00am EST, so, in my view, it's probably best to do it on the same day, around the same time to avoid confusion on which strikes to buy (in case the underlying price is moving away from the official trade examples). In addition, we should close all the trades before taking on the new trades. Hence, I would say the best schedule would be to have a couple hours on Friday Morning EST to close and then open all the positions every week.

20 hours ago, mustafaoe said:

Does the future options have different opening and closing hours? 

Yes, each future options has slightly different trading hours. Most commodity products' trading hours start Sunday evening and close Friday afternoon. I have the summary of trading timetable in the post below.

Hope this helps.

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1 hour ago, RapperT said:

We’ve been trading the 50k for months.  25k was just started for SO 3 weeks ago and we just had our worst week since inception.

Ok. Also you mention: "On the larger test portfolio also lost 5.4% due to a long put position in the E-mini futures".

 

So is the composition of the 50k portfolio different than that of 25k ? Can you please list the underlyings of the 50k portfolio ? Will this difference also cause the results of the two portfolios to be different ?

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@RapperT @Jjapp Sorry to harp on about this, but I promise this is the last time I will bring this up... at least for this week :D

 

Again I found it a bit hard to identify which options to select for some of the commodities, basically the ICE ones (KC and SB) as for the others live pricing helped me confirm which where the correct ones to select almost straight away.

 

I would like to draw your attention to week 4's SB alert. The alert stated "Sugar (SB):  UP       -       Bought 1 May/May .13 call at .0055". When I went to look for the correct option I could actually not find anything that pointed to such a combination, the closest were the April'19 (which was the correct one) and May'19 options however as you can see from the attached screen captures neither of them had a May/May combination.

 

Screen shots for each trade would be nice (they also eliminate typos and human error), but I understand that in the interest of time you may not be able to get nicely edited screenshots for each alert. However, maybe a text indicating which option you are picking on IB would help?

Basically something like:

Sugar (SB):  UP

Bought 1 May/May .13 call at .0055   [IB: Apr'19]

Total debit of $616.00

 

I think this will save you time down the track once you go live as new subscribers may bombard you with clarification requests on which option to buy if they are not sure?

Anyway, just my two cents, If I am the only one too slow to get which is the right option then pretend I didn't say anything and I will go back to my corner :D

 

Screenshot from 2019-01-12 23-04-55.png

Screenshot from 2019-01-12 23-06-38.png

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54 minutes ago, Manish71 said:

 

So is the composition of the 50k portfolio different than that of 25k ? Can you please list the underlyings of the 50k portfolio ? Will this difference also cause the results of the two portfolios to be different ?

The only difference right now is the ES position.  The 25K portfolio is too small to trade the ES at these volatility levels.  On occasion I'll trade a contract for a couple of weeks prior to adding it to the 25K portfolio.  So there was a two week period where I traded soybeans and wheat in the larger portfolio.  This is the first week it has caused a noticeable difference in performance. 

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