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Discussion in 'Options' started by Average Joe, Mar 1, 2016.

  1. Average Joe

    Average Joe Guest

    I have a question regarding a backtest position I have an unsure how to better adjust it.

    Underlying is RUT and the date is 2/22/2011. I have the following trade (NormalTrade.png) on and the RUT declined -21 points on that date and I am looking to adjust the downside. What would you do if you are given the following trade?

    Note that any adjustments for the downside I make will give up the upside flat t+0 line. The following (AdjustTrade.png) is the best alternative I think I can do to flatten the t+0, which is to move the 810 put spread back to the butterfly short strikes.

    would love the opinion of the forum

    Attached Files:

  2. Kevin Lee

    Kevin Lee Well-Known Member

    Try pulling in some or all of the 850 long to 840
  3. Average Joe

    Average Joe Guest

    Hmm wouldn't pulling those in worsen the downside? For example, if I pulled 5 of those in (sell 5 of the 850 puts and buy 5 of the 840 puts), I will get the blue line (KevinLeeSuggestion.png)

    The main problem I am experiencing when I am doing back testing the M3 is situations like this. The prior day (18th of feb, 2011) I went ahead and rolled up the butterfly since it was outside the tent and vega was positive. This left me with approximately ~25 points to the downside before I see my t+0 line negative slope increasing below 0. The very next day I get a huge drop -21 points. This places me right near the middle of the tent but the downside looks horrible with the t+0 line significantly lower. How do you guys handle such situations? Doing anything to flatten the downside t+0 will result in a riskier position on the upside. Thinking about my AdjustTrade.png yesterday, I don't think that is even ideal. Would rolling the butterfly back down ideal (new adjustment) ?

    Attached Files:

  4. Kevin Lee

    Kevin Lee Well-Known Member

    I was suggesting something like this

    Rick likes this.
  5. Average Joe

    Average Joe Guest

    thanks a lot Kevin for the help.

    Ive been backtesting in OV the M3 using various adjustments through 2011. When August came I got killed on the 60 point drop (-7% loss). Did you ever (or anyone) traded through that large point drop? How did you do and what did you learn from it? I am new to M3 and income trading so just wanted to see if I did anything wrong or if theres anything I missed.

    I've attached my before and after position during that day and its rather rough.

    thanks so much

    Attached Files:

  6. Kevin Lee

    Kevin Lee Well-Known Member

    Hi Average Joe,

    I do remember 2008 - 2011 period. Those were my learning years and I'm grateful to have started my learning journey back in those days when making money from income trades was far more difficult than it is today (despite what we experienced in Jan/Feb this year). It gave me a deep appreciation and respect of what risks mean.

    Back to your question - A few things I'd do :

    1. When IV is >50% as shown in yr chart, that's a really violent environment. Firstly, I would reduced my trading size significantly. Back in those days, coaches kept reminding us, beginner students to stay on the sideline or keep a tiny position just for the sake of practice.

    2011 was the first greek crisis, if i remember correctly. i traded very small and i did hit max loss in couple months. I haven't learnt low gamma trades yet. So my positions were subject to wild p&l swings. Obviously that gave me a deeper appreciation for low gamma strategies like the M3.

    2. In turbulent markets, i'd stay clear of low DTEs, again to avoid high gamma. I can hedge delta easily but gamma is a monster difficult to subdue. Even in calm periods like now, i refrain from trading in the last two weeks as much as possible. In turbulent times, i'd exit even sooner. Maybe that's my personality. I'd rather leave juicy potential gains on the table in exchange for more stable trading results, especially when I'm trading large account size.

    3. I would increase butterfly wing size, let say in this scenario to 70 pts or so and start my position 40 pts bearish. In this way, you can create a flat T+0 and maintain a wide safe zone both on the upper and lower section. The mistake I made in the past was i increased wing to 70 but didn't push the butterfly back. Not only the downside range isn't enough, when market stabilizes, the right leg of the butterfly will suffer a hugh crush if it's so far above market.

    I'm not on my pc. So i can't play with graphs on OV. You might want to back test with different wing size and different short-strike-to-market distance.

    This is what I can think of for now. Hope this helps.
    GreenZone, Gabor Maly, Venkat and 7 others like this.
  7. Average Joe

    Average Joe Guest

    I have a few questions regarding M3 in low volatility regimes.

    The last time I posted this I was running the tests on high volatility environment (2011). Re-watching some videos from JL and playing with position initiation under various market regimes I arrived at the following observations:

    -normal vol regime
    -butterfly around 10 bucks with around -80 delta

    -high vol regime = like trading further out expiration options ( 2011 )
    -butterfly around 7 bucks with around -50 delta
    -requires closer to the money calls to hedge

    -low vol regime = like trading close to expiration options (2013)
    -butterfly around 14 bucks with around -150 plus delta
    -requires a lot more calls to hedge

    Now with this general framework I went in to testing 2013. It was an annoying year with the vol being so low. I ended the year (backtest) with a loss. Generally I was trading further out 60 plus days as I had a hard time hedging my deltas with anything closer to expiration. My questions are....how have others dealt with low volatility environment (an consistent slow up moves)? Funny thing is JL from his videos says he was positive ~20% for that year. Have anyone attempt to trade further out and what were their experiences. I worry I am missing something as I feel that my rather large backtest results difference with JL may indicate I am approaching it incorrectly. Love to any any thoughts, thanks in advance.
  8. Kevin Lee

    Kevin Lee Well-Known Member

    -150 butterfly delta is too much at entry. Try using 40 pt wing. RUT was much lower in price then and with low vols, you'll need to tighten the wings. Otherwise, it's hard to construct a flat T+0. You might also have to split the short strike, ie shifting some of the short strikes up by 10 pts.

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