Predictive accuracy of OV

Discussion in 'OptionVue Forum' started by DavidF, Sep 16, 2015.

  1. DavidF

    DavidF Well-Known Member

    Am testing multiple set-ups on OV in addition to my actual trades and there are quite a few trades that I´d put under the ´too good to be true´category. Like this one where the risk-reward/probability of success if the trade is taken off at 15 days is very positive. Simply a butterfly with far OTM calls.

    So question is how accurate is this? Understand it´s positive vega on upside which is perhaps hard to model accurately but otherwise looks reasonably straight fwd.
    Screen Shot 2015-09-16 at 18.19.28.png
    Last edited: Sep 16, 2015
    Chuck likes this.
  2. GreenZone

    GreenZone Well-Known Member

    David, with all trading software you will regularly see fairly big differences between what the software claims will happen versus what will actually happen.
    The best way to determine the real viability of a trade is to backtest it throughout various types of markets (bearish, downside crashes, sideways, bullish, and "rip your face off" rallies).
    If you get decent results, then that should give you the confidence to start trading it live (at a small size if possible), and then gradually build up the size to whatever you want.
  3. Brian

    Brian Active Member


    The particular trade that you show will most likely not behave like your T+15 line is predicting. You mentioned positive vega on the upside - that's what would likely make it under-perform the model on a move to the upside, unless the move is very explosive (which it could be given the Fed announcement tomorrow). If you do get an explosive up move, you'd probably want to adjust that position fairly quickly, because volatility is likely to collapse up in that region, causing you to give up a lot of your profits. I would be worried about the fact the the RVX still has some room to fall - it could easily plummet into the mid-to-high teens if traders like the FOMC which case, a lot of the time premium would be sucked out of your 1240 calls, and the butterfly would be losing value at the same time. I'm not saying this is a bad position, just that it probably won't be as great as OV is suggesting on an up move. I would guess the T+15 line will act more like the T+23 line if the market moves up.


  4. Kevin Lee

    Kevin Lee Well-Known Member

    My two cents ..... The T+0 line will likely sink in 15 days more than what is predicted by the T+15 line. Reason is although OV handles CEV (shifting up or down of the IV curve), but it does not model the changes in the slope of the IV curve. The truth is the change in the slope of the IV curve is extremely hard to predict accurately because that depends on multiple factors. However, in general, if the market grinds up, overall IV falls and the slope of the IV curve will steepen at the same time. In addition, the nearer to expiration, the steeper the slope.

    Therefore, the IV of the OTM call will likely drop further than what the OV model predicts. For the same reason, the IV of the right leg of the butterfly will also drop more. The net result of all these will be a T+0 line 15 days later that sinks on the right side more than what the current T+15 line is predicting.

    However, you cannot try to compensate simply by lowering the overall IV because by doing so, IV of every strike will be lowered the same amount. That's not what's happening here.
    RayM, Venkat and GreenZone like this.
  5. DavidF

    DavidF Well-Known Member

    Thanks a million for your thorough advice and feedback gents, much appreciated. Pretty much confirms what I thought.

    Ron, agree. I hasdn´t realised I never purchased backtrader on OV, but I had to get QuoteVue as I dont´have another source of live quotes (am European so no TOS), and that costs $2k per annum (plus monthly fees) and backtrader is another $1k on top. Would probably pay for itself of course. Will get it eventually.

    Brian, good points and makes complete sense. Am actually very surprised the volatiity collapsed as much as it did in the last few days, and even in the hours after I posted the trade it didn´t model like it did with RUT moving continually up. And this will be magnified in days ahead as you say, if reaction to FOMC is positive.

    Kevin, great explanation (as always). Something I´ve been meaning to ask you..on your M3 trades, does the high extrinsic on the DITM calls in a high vol environment (relative to 2012-2104 at least) hurt the returns or is it compensated for by more BFs providing extra theta? I assume you´re sticking to DITM calls and not going over to TF futures?
  6. uwe

    uwe Well-Known Member

    Can you open an IB account? I'm European as well (Germany). OptionVue works (more or less) with IB.
  7. DavidF

    DavidF Well-Known Member

    Uwe, thanks for heads up, I´ll look into it. Have been with optionsXpress for 4 yrs, get good rate on commissions with them and very familiar with platform so will have to decide whether I just cough up the money for backtrader or switch brokers.
  8. Kevin Lee

    Kevin Lee Well-Known Member


    DITM calls do get more expensive in high vol environment, but the issue is more than being compensated by the butterflies. One call can hedge many more flies and the T+0 line is much more friendly. So on balance, I would much prefer a higher vol and lower vol environment.

    With regards to TF futures, I use it speculatively. When TF prices fall way below fair value relative to index, then I'd switch over. It doesn't happen most of the time but when it happens, then the rebound can be profitable very quickly. But the downside risk is bigger. So gotta be careful.
  9. DavidF

    DavidF Well-Known Member

    Thanks a lot Kevin, I'd been wary of entering an M3 based the theta on the calls, unwarranted I see. As you may recall I'd also been using /ES on SPX but like you say, downside not attractive.
  10. Kevin Lee

    Kevin Lee Well-Known Member

    One suggestion is to back test all kinds of environment to get familiar with the nuances. When I did that, I realized the most difficult period to trade M3 is when vol is extremely low, eg. RVX < 13-15 or VIX < 10-12.

    M3 is the most resilient strategy among those I've traded in handling market volatility (I mean realized vol, not implied vol). It can withstand wide market swings quite well as long as the vol didn't shoot up like crazy after entry.

    Therefore, on balance, I feel it is safer to enter when vol is high than when vol is extremely low. The best of course is the mid range - RVX between 20 to 25 I think.
    SVL, Al G., GreenZone and 2 others like this.
  11. DavidF

    DavidF Well-Known Member

    Thanks again Kevin. Looks like period ahead is going to be good for these trades. Was listening to Evan Rothschild's talk last night on risk, would actually be hard to trade an M3 using his 25% max. loss rule (albeit he underlines it's individual choice) with less than 120k in your account (approx. max loss of 30k for once tranche) but rarely, if ever, taking a loss on the upside with an M3 might more than make up for the increased downside risk vs a BB (or even rhino). But hard to quantify with so many adjustment variables.
  12. ACS

    ACS Well-Known Member

    David. FWIW the trade you modeled is called a Modified Rock by john Locke and is one of the entry configurations used in his Rock Trade when volatility is high. It would usually be a temporary position that transitions to some other configuration before too long.
    GreenZone likes this.
  13. DavidF

    DavidF Well-Known Member

    ACS, thank you for the info. I´ve put a small trade on with a similar configuration but with a call spread instead of the naked calls, there´s a no mans land from 1200-1230 but my Nov trades should be profitable there.

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