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Let's Trade Options

  • #9,241
  • Jun 27, 2015 1:06am Jun 27, 2015 1:06am
Quoting The Fool
do any of you track your trading performance?
There's a chapter (Ch. 9) in Sinclair's book - "Trade Evaluation" which has some good info on performance evaluation. Ch. 8 is on "Money Management" & includes good info on trade sizing....

http://www.amazon.com/Volatility-Tra...=euan+sinclair
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,242
  • Jun 27, 2015 1:18am Jun 27, 2015 1:18am
while I am posting links....there's a lot in the one below for somebody who likes to dig...

http://godotfinance.com/workingpapers/
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,243
  • Jun 27, 2015 1:30am Jun 27, 2015 1:30am
Quoting The Fool
do any of you track your trading performance? http://www.forexfactory.com/showthread.php?t=22287 http://web.stanford.edu/~wfsharpe/ http://www.orderflowtrading.com/Arti...g-success.aspx http://traderfeed.blogspot.com/2014/...ring-your.html https://steadyoptions.com/performance_2013

Interesting thanks for bringing up.

I am trying to figure out on excel as to how can i keep track with the trading data i have. 1 thing i found out from the link above is they tend to exclude commission which will be a big discount. To date my account is up approx 9% excluding commission, but if add that in i am down 11% , yes you are right.. commission has eaten 20% all in.
  • #9,244
  • Jun 27, 2015 1:37am Jun 27, 2015 1:37am
Quoting The Fool
do any of you track your trading performance? http://www.forexfactory.com/showthread.php?t=22287 http://web.stanford.edu/~wfsharpe/ http://www.orderflowtrading.com/Arti...g-success.aspx http://traderfeed.blogspot.com/2014/...ring-your.html https://steadyoptions.com/performance_2013
best leverage to use:

suppose a system has 50% win rate, and the gain per win is G, but the loss per fail is L.

without leverage the final gain after two trades is (1+G)(1-L)

now with x times leverage two trades delivers gain (1+xG)(1-xL)

the benefit of leverage over no leverage is

B = (1+xG)(1-xL) - (1+G)(1-L) = -G*L*x^2 + x*(G-L) + G*L-G +L

This is a inverse parabolic function, with a max appearing at

dB/dx = 0 which leads

-2x*G*L + (G-L) = 0

so x = (G-L)/(2*G*L)

for a system that has 2% G and 1% L

best leverage x = (0.02-0.01)/(2*0.02*0.01) = 25

for a system that has 1% G and 0.5% L

best leverage x = (0.01-0.005)/(2*0.01*0.005) = 50

for a system with 1% G and 0.75% L

best leverage x = (0.01 - 0.0075)/(2*0.01*0.0075) = 16.7
ignore wackos and psychos, including myself. But I can't add myself to iggy
  • #9,245
  • Jun 27, 2015 1:50am Jun 27, 2015 1:50am
Quoting ffleo
{quote} best leverage to use: suppose a system has 50% win rate, and the gain per win is G, but the loss per fail is L. without leverage the final gain after two trades is (1+G)(1-L) now with x times leverage two trades delivers gain (1+xG)(1-xL) the benefit of leverage over no leverage is B = (1+xG)(1-xL) - (1+G)(1-L) = -G*L*x^2 + x*(G-L) + G*L-G +L This is a inverse parabolic function, with a max appearing at dB/dx = 0 which leads -2x*G*L + (G-L) = 0 so x = (G-L)/(2*G*L) for a system that has 2% G and 1% L best leverage x = (0.02-0.01)/(2*0.02*0.01)...
for a system with 1% gain and 0.9% L
best leverage is x= (0.01-0.009)/(2*0.01-0.009) = 5.6

for a system with 2% G and 1.8% L
best leverage is x = (0.02- 0.018)/(2*0.02*0.018) = 2.8
ignore wackos and psychos, including myself. But I can't add myself to iggy
  • #9,246
  • Jun 27, 2015 1:56am Jun 27, 2015 1:56am
that's cool, ffleo, but we don't use "leverage" in options trading. The pricing method for options results in derivatives that are "leveraged", but we don't have any control over that. What we can control is the size of our trades and the amount of margin we put at risk, relative to available equity.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,247
  • Jun 27, 2015 2:08am Jun 27, 2015 2:08am
Quoting nickah
{quote} Interesting thanks for bringing up. I am trying to figure out on excel as to how can i keep track with the trading data i have. 1 thing i found out from the link above is they tend to exclude commission which will be a big discount. To date my account is up approx 9% excluding commission, but if add that in i am down 11% , yes you are right.. commission has eaten 20% all in.
well I don't know where you are trading but you are evidently paying some high comms. I feel your pain - I have IRA trading accounts at some of the "discount" houses in the US and they are gouging me on comms. The latter fact exacerbated by virtue of me trading spreads most of the time. Options trading is expensive, generally, until you are able to get your equity up to the portfolio margin limit - $125k....
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,248
  • Jun 27, 2015 2:11am Jun 27, 2015 2:11am
Quoting The Fool
that's cool, ffleo, but we don't use "leverage" in options trading. The pricing method for options results in derivatives that are "leveraged", but we don't have any control over that. What we can control is the size of our trades and the amount of margin we put at risk, relative to available equity.
Now comes another question: how to control position size for max profit.

Suppose a system has risk ratio G/L = R, where G is gain and L is loss. And this system has a win/Loss rate 50%

so two trades gives total gain TG= (1+G)(1-L) = (1+R*L)(1-L).

now the question is how to adjust position size to the desired G and L in percentage to maximize the total gain TG

TG = -R*L^2 + L*(R-1) +1 this is also ab inverse parabolic function of L, and has a max at

d TG/dL = 0 which leads to

-2R*L + (R-1) = 0
or L = (R-1)/(2R) and G = (R-1)/2

so if the G/L ratio is R=2, adjust position size to have G = 0.5 = 50%, L = 0.25 = 25%. wow that looks like too large, but in really the same as the leverage example above.
ignore wackos and psychos, including myself. But I can't add myself to iggy
  • #9,249
  • Jun 27, 2015 2:17am Jun 27, 2015 2:17am
Quoting ffleo
{quote} Now comes another question: how to control position size for max profit. Suppose a system has risk ratio G/L = R, where G is gain and L is loss. And this system has a win/Loss rate 50% so two trades gives total gain TG= (1+G)(1-L) = (1+R*L)(1-L). now the question is how to adjust position size to the desired G and L in percentage to maximize the total gain TG TG = -R*L^2 + L*(R-1) +1 this is also ab inverse parabolic function of L, and has a max at d TG/dL = 0 which leads to -2R*L + (R-1) = 0 or L = (R-1)/(2R) and G = (R-1)/2 so if the G/L...
How about R = 3?

then G = 1 = 100%, and L = 0.33 = 33%
ignore wackos and psychos, including myself. But I can't add myself to iggy
  • #9,250
  • Jun 27, 2015 2:19am Jun 27, 2015 2:19am
Quoting ffleo
{quote} Now comes another question: how to control position size for max profit. Suppose a system has risk ratio G/L = R, where G is gain and L is loss. And this system has a win/Loss rate 50% so two trades gives total gain TG= (1+G)(1-L) = (1+R*L)(1-L). now the question is how to adjust position size to the desired G and L in percentage to maximize the total gain TG TG = -R*L^2 + L*(R-1) +1 this is also ab inverse parabolic function of L, and has a max at d TG/dL = 0 which leads to -2R*L + (R-1) = 0 or L = (R-1)/(2R) and G = (R-1)/2 so if the G/L...
for R = 1.5

G = 25% and L = 16.7%
ignore wackos and psychos, including myself. But I can't add myself to iggy
  • #9,251
  • Jun 27, 2015 2:19am Jun 27, 2015 2:19am
Quoting ffleo
Now comes another question: how to control position size for max profit.
there are many ways to skin that cat - max profit sounds good, but within what range of acceptable risk? These questions all traders must work through to find their sweet spot, what they are comfortable with, can understand and replicate. I can't pretend that I have done so myself. Currently I am simply minding limits on total margin at risk at any given time, max drawdown, etc, with a m/l steady range of trade sizing in terms of trade size and related max risk as a percent of total equity
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,252
  • Jun 27, 2015 2:21am Jun 27, 2015 2:21am
Quoting ffleo
{quote} Now comes another question: how to control position size for max profit. Suppose a system has risk ratio G/L = R, where G is gain and L is loss. And this system has a win/Loss rate 50% so two trades gives total gain TG= (1+G)(1-L) = (1+R*L)(1-L). now the question is how to adjust position size to the desired G and L in percentage to maximize the total gain TG TG = -R*L^2 + L*(R-1) +1 this is also ab inverse parabolic function of L, and has a max at d TG/dL = 0 which leads to -2R*L + (R-1) = 0 or L = (R-1)/(2R) and G = (R-1)/2 so if the G/L...
what about R = 1.2?

adjust position size to have
G = 10% and L = 8.3%
ignore wackos and psychos, including myself. But I can't add myself to iggy
  • #9,253
  • Jun 27, 2015 2:23am Jun 27, 2015 2:23am
Quoting The Fool
with a m/l steady range of trade sizing in terms of trade size and related max risk as a percent of total equity
the latter gets tricky in options trading as there are some trades that have, technically, infinite risk....
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,254
  • Jun 27, 2015 2:24am Jun 27, 2015 2:24am
Quoting ffleo
{quote} what about R = 1.2? adjust position size to have G = 10% and L = 8.3%
lots of people would say shit if I have 8.3% loss that is too large. Wrong. If someone has a system with R = 1.2, for god damn sake use 10% gain and 8.3% loss to max profit.
ignore wackos and psychos, including myself. But I can't add myself to iggy
  • #9,255
  • Jun 27, 2015 2:26am Jun 27, 2015 2:26am
Quoting The Fool
{quote} the latter gets tricky in options trading as there are some trades that have, technically, infinite risk....
what if you only buy calls or puts then your risk is only the premium.
ignore wackos and psychos, including myself. But I can't add myself to iggy
  • #9,256
  • Jun 27, 2015 2:29am Jun 27, 2015 2:29am
Quoting ffleo
{quote} lots of people would say shit if I have 8.3% loss that is too large. Wrong. If someone has a system with R = 1.2, for god damn sake use 10% gain and 8.3% loss to max profit.
I regularly set trades up that represent 5 or 10% risk of total equity, sometimes even more, but I know that I will be adjusting those trades before they move on that maximum loss, if that's the way things go.

At any rate, I bring it up here because trade sizing and performance measurement and monitoring are subjects that profitable traders have to get a handle on...my near term goal is to do better at those.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,257
  • Jun 27, 2015 2:31am Jun 27, 2015 2:31am
Quoting ffleo
{quote} what if you only buy calls or puts then your risk is only the premium.
sure, long calls or puts max risk is the total cost of the trade. There are other "defined risk" trades that I do most of the time - spreads - spreading allows one to "define" or limit the total risk of the trade in exchange for a limited profit.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,258
  • Jun 27, 2015 2:37am Jun 27, 2015 2:37am
Quoting The Fool
{quote} sure, long calls or puts max risk is the total cost of the trade. There are other "defined risk" trades that I do most of the time - spreads - spreading allows one to "define" or limit the total risk of the trade in exchange for a limited profit.
is your R > 1?
ignore wackos and psychos, including myself. But I can't add myself to iggy
  • #9,259
  • Jun 27, 2015 2:49am Jun 27, 2015 2:49am
Quoting ffleo
is your R > 1?
There are large numbers of possible R's, because there are large numbers of possible legs in a spread trade. The larger the R of a particular trade, the less likely that said trade will result in a profit. I would show you some examples but I can't get in my trading platform at the moment....
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,260
  • Jun 27, 2015 2:52am Jun 27, 2015 2:52am
Quoting The Fool
{quote} There are large numbers of possible R's, because there are large numbers of possible legs in a spread trade. The larger the R of a particular trade, the less likely that said trade will result in a profit. I would show you some examples but I can't get in my trading platform at the moment....
It is like if I want to marry a princess it is less likely it is gonna happen
ignore wackos and psychos, including myself. But I can't add myself to iggy
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