SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

RapperT

Welcome to Steady Futures

Recommended Posts

Welcome to Steady Futures!

 

Steady Futures is a systematic trendfollowing strategy utilizing futures options.  The system is a long volatility (debit trades) strategy utilizing either debit spreads or at the money puts and calls.  After testing, we settled on a stop and reverse system which means the system is always long or short every contract that is included in the portfolio.

 

What is Trendfollowing?

 

In its simplest form trendfollowing is a systematic trading approach that uses current price data in conjunction with historical price data to identify trends in any given market.  In classic time series trendfollowing systems, a positive recent return would signal a long position while negative recent return would signal a short position.  Obviously, there are models that are more complicated than that and factors will vary from one program to the next, but the point is that there is no human discretion involved in entries or exists.  Rules are developed, often times systems will be back tested, and then the system is programmed so that signals are produced automatically.  Some of the early modern trend systems were developed using punch cards.  Currently traders will use a variety of programming languages to automate the process.  Most trendfollowing systems are very simple with straightforward rules.  There are even still some traders that do everything by hand based on metrics like moving averages or breakouts.

 

System schedule:

 

The system runs every Thursday night and generates a signal before market open on Friday. If the signal has changed or an open position has moved from the targeted delta, we will open a new position. This allows us 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. We do not modify open trades intraweek. No adjustments, no taking profits. The trade runs until the following Friday.

 

We post the signal and delta for each contract on Friday morning, subscribers can take the trade at any point in the day.  We post our fills too but there is no need to wait for our trades nor should anyone try to match strikes exactly as sharp moves in the underlying are not uncommon.

Here is an example of the signals posted on Friday:


image.png

As you can see, all signals include the symbol, the direction and the delta of the suggested trade. The actual trades are posted during the day on Friday, based on the signals, but members can enter the trades based on the information posted. Most trades last around 1-4 weeks, and we will post the exit trades when we decide to exit.

 

Signal generation:

 

We generate our signal using an ARIMA model. An ARIMA model sounds complicated so we will try to simplify here. Generally it is a tool used by econometricians to forecast time series and is particularly helpful when a time series shows evidence of non-stationarity (technical speak for “trending”). There are three parts to the model. The first is the auto-regression piece (AR). This piece forecasts a future value based on a regression against lagged values in the time series. The second piece is "integrated" (I). This refers to a technique used to make a time series stationary through differencing. (You can forecast stationary time series...non stationarity causes problems so the "I" term converts a trending series to stationary for the purposes of the forecast). The final piece is a moving average (MA). This is not a standard moving average you'll see in technical analysis books. The MA says that the error terms are a linear combination of previous error terms. Each of these items are a parameter in the model. For example, I could run the model on gold with parameters (3,0,1) which will give me a different forecast than (1,1,1).

 

Every week we run this model on every possible combination of parameters for each futures contract and then select the parameters that return the lowest Akaike Information Criteria. This can be thought of as a relative "goodness of fit" measure. Technically this means we are data mining a bit. Once we have the best forecast for the training time window (empirically that window needs to be between several months to several years) we forecast next week's return.

 

While we track traditional forecast accuracy what we're really shooting for is getting the direction “correct enough” to make money. Using long options already gets us some asymmetry in our results and then the fact that we can ride some really big moves with leverage at defined risk improves our results.

 

Risk:

 

We think about risk in two ways. The first is total possible loss on the trade. This is determined by the amount of the debit in each option trade. For example, if I'm trading four commodities and I'm risking $1K per contract or spread, my top risk is $4K for the week. While it should be rare for each trade to be a loser in a given week, we expect it to happen at some point. This is a mathematical certainty if you trade long enough.

 

The second way we look at risk is delta targeting based on the last 4 weeks range in weekly returns. If based on the last 4 weeks the commodity moved 5% on average we will size the deltas in the trade to make sure the average loss is around 1/2 a percent.

 

Currently we limit risk per position to a maximum of 1% of the portfolio.

 

Portfolio size:

 

The model portfolio is based on a 50K account.  From a volatility consideration, this is the smallest account size we recommend.  All contracts must be traded every week so we don’t recommend trading smaller and selectively choosing contracts.  We never know what contract will be trending and winners often come quickly and in bunches.

 

Why we trade some spreads:

 

Trendfollowing is predicated on getting the most out of winners as TF has a lower win rate than some discretionary systems.  However, trading OTM options hurt the performance of the system when we tested in the first half of the year as even when the forecast was correct, we would see deep OTM options end up as losers.  This is a non-factor when trading large accounts but we want to make the system as accessible to as many subscribers as possible.  The positive to a slightly lower upside on our winners is lower overall system volatility which makes it easier for retail trader to stick with the process even during drawdowns. 

 

Management style:

 

This system is 100% systematic.  We find some traders have a very difficult time with this.  We do not recommend adding discretionary trades and we won’t give input or feedback on such in the forums.

 

Performance:

 

During the 3 month trial of the 50k model, the system has returned 11.78% on a win rate of 61%.  While we are exceptionally happy with these results, both are higher than we should expect long term.  To determine if a system is viable, we need to quantify the total expected return based on the size and frequency of winning trades versus size and frequency of losing trades.  This is referred to as the “expectancy” of a given system.  As previously mentioned, many very successful trendfollowing systems have low win rates relative to other trading methods.

 

Trendfollowing returns often come in bunches.  A big part of being successful is sticking with the strategy during slow periods.  There is more written about this in the Steady Futures forums.  Many trendfollowing systems perform extremely well during volatile times in equity or commodity markets.  For this reason many traders will always have some portion of their portfolio allocated to trendfollowing.

Share this post


Link to post
Share on other sites
2 hours ago, FrankTheTank said:

It looks like the strategy started trading in December 2018.   Are the entry rules still the same as back then or have things changed?  Thanks.

 

Hi Frank,

 

We made changes around trade implementation, rolling, and risk.  The process for generating signals has not been changed.

 

Overall the changes have been positive and have improved returns in the short term.

Share this post


Link to post
Share on other sites
5 hours ago, gabbox said:

It looks solid but 3 months is not enough. Can you show a backtest ? and how many times did you optimize/change the backtest ?

we've been trading the larger account size for over year and we can post these results at some point in the next few weeks.  There are several obstacles around back testing with futures options including a reliable historical data source.  We could do it with the underlying futures but at this point we aren't really interested in doing it as 15 months or so of live trading is more valuable to us.

Share this post


Link to post
Share on other sites
5 hours ago, gabbox said:

It looks solid but 3 months is not enough. Can you show a backtest ? and how many times did you optimize/change the backtest ?

Short track record of live signals is one of the reasons of the low introductory price. Early adapters always take some risk, but similar systems with longer track record charge 4-5 times of what we do. SF service price is likely to at least double in no time.

As @RapperTmentioned, the system itself is not new, they just switched to live $50k portfolio 3 months ago. 

Share this post


Link to post
Share on other sites
7 minutes ago, Miscelanos said:

Just one question - how trades will be announced? In similar style to SteadyOptions? I am asking because of time difference between US and where I live.

I feel that trade entering time is quite important.

We post the signals (long or short) and the target delta usually within the first hour of market open on fridays.

 

This is a little different than some of our other systems on SO.  You can actually take the trade any time during the day even if underlying has moved, just target the delta that we provide.  Does that make sense?

Share this post


Link to post
Share on other sites
1 minute ago, RapperT said:

We post the signals (long or short) and the target delta usually within the first hour of market open on fridays.

 

This is a little different than some of our other systems on SO.  You can actually take the trade any time during the day even if underlying has moved, just target the delta that we provide.  Does that make sense?

So you will post signal only and not actual trades?

Share this post


Link to post
Share on other sites
1 minute ago, Miscelanos said:

So you will post signal only and not actual trades?

no we post both.  But you dont need to match our exact strikes.  The important thing is that you enter at the appropriate delta.

Share this post


Link to post
Share on other sites
1 minute ago, RapperT said:

no we post both.  But you dont need to match our exact strikes.  The important thing is that you enter at the appropriate delta.

Ok, now I got it. Thanks for clarifications. I am trading only SO now, would it be correct to assume that SO+SF portfolio size should be around 60k?

Share this post


Link to post
Share on other sites
52 minutes ago, RapperT said:

we've been trading the larger account size for over year and we can post these results at some point in the next few weeks.  There are several obstacles around back testing with futures options including a reliable historical data source.  We could do it with the underlying futures but at this point we aren't really interested in doing it as 15 months or so of live trading is more valuable to us.

Ok. I would like to see at least the backtest on the underlying and the last 15 months real because it is like the "DNA" of the strategy 

Share this post


Link to post
Share on other sites
On 10/1/2019 at 4:47 AM, gabbox said:

and how many times did you optimize/change the backtest ?

Hi gabbox,

We haven't changed the signal generation since launch (we have changed trade implementation).  The parameters that go into the statistical forecast are based on trailing 6 months of data and are auto-updated every Thursday.  The objective function used in the auto-update minimizes the akaike information criterion for the model.  I haven't been tracking how often those parameters change but my guess is that they change rarely.  Right now the model is running a straight ARIMA forecast but we may layer on other statistical models in the future if they prove out.  We don't do manual backtests.  Hope that helps. 

-John

Share this post


Link to post
Share on other sites
On 10/3/2019 at 12:25 AM, Jjapp said:

Hi gabbox,

We haven't changed the signal generation since launch (we have changed trade implementation).  The parameters that go into the statistical forecast are based on trailing 6 months of data and are auto-updated every Thursday.  The objective function used in the auto-update minimizes the akaike information criterion for the model.  I haven't been tracking how often those parameters change but my guess is that they change rarely.  Right now the model is running a straight ARIMA forecast but we may layer on other statistical models in the future if they prove out.  We don't do manual backtests.  Hope that helps. 

-John

Thank you.
I understand that it is not easy to backtest it but I guess you used some sort of underlying backtest to evaluate the performance of the model. 
What yearly return did the backtest produce more or less and what max drawdown and how many years did you test ?(sharpe/sortino ratio would be nice to know if you calculated it)
Also could it be more profitable to trade credit bull/bear spreads ?

Share this post


Link to post
Share on other sites

Your content will need to be approved by a moderator

Guest
You are commenting as a guest. If you have an account, please sign in.
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

  • Recently Browsing   0 members

    No registered users viewing this page.