Modeling a Strategy

[william the wie]

My goal minimal losses 87.5% of the time and really big gains 12.5% of the time.

Starting point buying an at the money straddle with an expiration date of about a year away.

Original loss minimization model buy more straddles as the market moved. The does reduce losses and has worked for me.

New idea buy a slightly out of the money put when the market goes up or a slightly out of the money call when the market goes down. More profit is good but less loss when the market is in a trading pattern is better.

What's wrong with this strategy, anything obvious?

 

[Toro]

Implied volatility is overpriced compared to realized volatility. Therefore, you are usually overpaying for options.

 

[william the wie]

Implied volatility is overpriced compared to realized volatility. Therefore, you are usually overpaying for options.

true. Therefore the 7 to 1 losers to winners ratio, the need to minimize losses and even if both the top and bottom are nailed that's only 2500- gross on the mini S&P for each round trip in 7 out of 8 years with 2500 to 3000 annual buy in. However unless you know a way of nailing tops and bottoms that's as good as it gets on a risk adjusted basis. I expect to lose 500-1000 most years and currently risk premiums are excessive so I am expecting the melt up to continue for the rest of the year, the majority is always wrong. Good point though. I have calls at 115, 125 and 130 I don't expect to buy any more for the rest of the year.

 

[Toro]

What are you trying to profit on, momentum or reversion to the mean?

 

[william the wie]

What are you trying to profit on, momentum or reversion to the mean?

Reversion to the mean. Latency does create momentum but reversion to the mean is generally easier to model for loss limitation and letting profits run. Take LTCM to 9/11:

3 actionable downturns in less than 4 years when the 100 year average is one such downturn every 4 years.

The big money in that period was riding the market up to the March 2000 blowout.

On the other hand big actionable moves 1968-82 were kind of scarce. With that level of variance I want a strategy that can minimize losses with normal volatility and profit on major moves when reversion to the mean kicks in.

 

[T-Bor]

English please??

 

[william the wie]

What are you trying to profit on, momentum or reversion to the mean?

Reversion to the mean. Latency does create momentum but reversion to the mean is generally easier to model for loss limitation and letting profits run. Take LTCM to 9/11:

Reversion to the mean is a big downturn being followed by a recovery or a run-up way past value is followed by a downturn. Latency means catching on late to the news of a trend reversal but as long as money keeps coming into the market faster than it leaves then the market goes up. Eventually the supply of people with more money than brains runs out and either profit taking or short coverage causes reversion to the mean.

3 actionable downturns in less than 4 years when the 100 year average is one such downturn every 4 years.

in august 1998, march 2000 and september-november 2001 there were rapid and profitable downturns in equities where puts and shorts made money.

The big money in that period was riding the market up to the March 2000 blowout.

On the other hand big actionable moves 1968-82 were kind of scarce. With that level of variance I want a strategy that can minimize losses with normal volatility and profit on major moves when reversion to the mean kicks in.

Is that easier to follow?

 

[Jenna93Zwang]

My goal minimal losses 87.5% of the time and really big gains 12.5% of the time.

Starting point buying an at the money straddle with an expiration date of about a year away.

Original loss minimization model buy more straddles as the market moved. The does reduce losses and has worked for me.

New idea buy a slightly out of the money put when the market goes up or a slightly out of the money call when the market goes down. More profit is good but less loss when the market is in a trading pattern is better.

What's wrong with this strategy, anything obvious?

Please clarify what are you talking about, the only thing i can understand from this is that, it is related to the money exchange strategies of present day market.

 

[william the wie]

My goal minimal losses 87.5% of the time and really big gains 12.5% of the time.

Starting point buying an at the money straddle with an expiration date of about a year away.

Original loss minimization model buy more straddles as the market moved. The does reduce losses and has worked for me.

New idea buy a slightly out of the money put when the market goes up or a slightly out of the money call when the market goes down. More profit is good but less loss when the market is in a trading pattern is better.

What's wrong with this strategy, anything obvious?

Please clarify what are you talking about, the only thing i can understand from this is that, it is related to the money exchange strategies of present day market.

Actually no, index options XSP options to be exact. Financial crises should be more common during the switch to a more online world. 90+% of the world's population should be online by the end of the decade vs. 30+% now and beyond the obvious killing of most types of sticks and bricks retail no one knows what that means.

 

[Chilton]

I think reversion to mean strategy in the need of the hour but most of the traders are following other models to minimize the loss by hooks or by crooks.But bottom line is that we are losing and losing fast....

 

[waltky]

Caterpillar has little room to talk...

Caterpillar: Washington, get your act together!
July 22, 2011: Caterpillar chairman and CEO Doug Oberhelman believes a ''lack of confidence in the business climate' is holding back the U.S. economy.

For a while, "uncertainty" has been the buzzword economists use to describe the main hurdle holding back the recovery. Now Caterpillar's CEO is chiming in, saying it's true -- at least for his business. Washington's dawdling on the debt ceiling, trade agreements and tax policy is causing his customers to hold back on buying heavy machinery. "Lack of clarity on a U.S. deficit reduction plan, trade policy, regulation, much needed tax reform and the absence of a long-term plan to improve the country's deteriorating infrastructure, do not create an environment that provides our customers with the confidence to invest," Caterpillar chairman and CEO Doug Oberhelman said in the company's earnings release Friday.

It wasn't the first time Oberhelman has been an outspoken critic, accusing the government of creating a murky business climate. In March, he sent a letter to the governor of Illinois, hinting that the company might leave the state for greener pastures, after lawmakers there raised taxes for both businesses and individuals. He changed his mind a week later, after meeting privately with Gov. Pat Quinn. Oberhelman is a regular donor to the Republican party, and in 2008 he contributed the legal maximum of $4,600 to John McCain's campaign, according to records tracked by the Center for Responsive Politics.

Caterpillar is headquartered in Peoria, and employs 23,000 people in Illinois alone. As one of the world's largest manufacturers of construction and mining equipment, the company employs 104,000 people around the globe. The company's U.S. operations were hit hard by the decline of the construction industry after the housing bubble burst. But internationally Caterpillar has benefited from strong industrial growth in emerging markets like China. Overall, Oberhelman said the company expects the U.S. economy to grow moderately, but "a lack of confidence in the business climate is the major impediment to a stronger recovery and job creation." The company said it forecasts the U.S. economy will grow 2.5% in 2011, down from 2.9% in 2010. In contrast, it expects China's economy to grow 9%, compared with 10.3% in 2010.

Second-quarter earnings: Caterpillar's net income rose to $1.02 billion, or $1.52 per share, in the three months ended June 30. That marked a 44% increase over the year-earlier quarter. Excluding one-time charges related to Caterpillar's acquisition of Bucyrus, earnings came in at $1.72 a share, and fell short of analysts' estimates for $1.74. Revenue of $14.2 billion was up 37% from a year earlier. Japan's tsunami and earthquake caused the company a major setback in the second quarter, hitting Caterpillar's bottom line with a $200 million blow to sales and a $60 million impact on its operating profit. Caterpillar shares fell 7.7% in early trading.

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Dow dragged down by Caterpillar
July 22, 2011: Stocks were mixed in early trading Friday, with the Dow industrials dragged lower by shares of Caterpillar, after the industrial conglomerate reported disappointing earnings.

Investors were also on edge over the latest moves (or lack thereof) on the U.S. debt ceiling, as well as Greece's debt woes. The Dow Jones industrial average lost 44 points, or 0.3%; the S&P 500 shed 3 points, or 0.2%; while the Nasdaq Composite rose 5 points, or 0.2%. Shares of Caterpillar sank more than 6%, making the construction equipment maker the weakest member of Dow and the third-worst performer on the S&P 500. Caterpillar's earnings fell short of forecasts.

Caterpillar's disappointing report dragged other equipment manufacturers lower as well, including shares of Deere, Cummins and Joy Global. "There were pretty high expectations for Caterpillar heading into its earnings this season," said Anthony Conroy, head trader with BNY ConvergEx. "Despite their miss, I'm still optimistic for this earnings season."

Friday's early weakness comes a day after U.S. stocks surged, following news that European leaders reached an agreement to contain Greece's debt crisis. The aid package, which officials said will cover all of Greece's financing needs, involves lowering interest rates and extending the payback period on existing loans to Greece from the EU and International Monetary Fund. "The outlook for both the U.S. and Europe is clearly getting better but it's not over yet," Conroy said.

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