[R-SIG-Finance] probability of 50% profit on short options trade

[Frank]

David,

I downloaded the SPY options for November 2016. There are 102160 rows of
data. Looking only at the 1/20/2017 expiration options, there are 398
out-of-the-money calls with both volume and open interest and 802
out-of-the-money puts. Figuring out which strangles and straddles would meet
their 1 sigma strategy definition would be a daunting task. This is not
really a problem with R but a problem of what is the definition of a 1 sigma
strategy or straddle. There is also the possibility of data mining the best
strategies.

Once the strategies that meet the 1 sigma definitions are identified, it is
a piece of cake to identify how many strategies make it to 50% profit and
how many are profitable at expiration. I'd do the calculations in C and also
keep track of the maximum loss. 

In just writing this email, I've figure out another problem. I could
identity strangles that are about 1 sigma away from the current SPY price,
but, what do they mean by a 1 sigma straddle? 

Best,

Frank
Chicago, IL



________________________________________
From: David L. Van Brunt, Ph.D. [mailto:dlvanbrunt at gmail.com] 
Sent: Sunday, December 25, 2016 1:46 PM
To: Frank; Chris Waggoner
Cc: r-sig-finance at r-project.org
Subject: Re: [R-SIG-Finance] probability of 50% profit on short options
trade

Frank and Chris- 

Yes, the Dough folks are advocating a strategy that I'd like to study a bit
more since the things you both mentioned all jump right out. I think Chris
took my "get started" comment to mean get started in trading this (or
trading at all), rather than get started on the evaluation of their claims--
I was not clear. My "finding the best trading opportunities" is so I can
study their strategy from there. I've been investing and trading profitably
for 20 years (longs, shorts, equities, indices, options, actual real
estate...), but I enjoy reading and studying what others are up to in my
spare time (as FT job responsibilities allow). So when I see extraordinary
claims I like to try replicating and studying them for myself - it's fun,
and I learn a lot in the process. So many gurus cherry pick from history
(Frank caught that right off), since the most popular thing to sell for a
profit is "advice". :-)

To dissect Dough's broader claims, I'd have to reproduce what they've done
with their "probability of 50% profit" but they're not really giving enough
information to replicate it that I've been able to find. 

Hence the post.

It sounds like thus far the short answer from this R forum is simply "we
don't know how to reproduce that."  


On Fri, Dec 23, 2016 at 11:34 AM, Frank <frankm60606 at gmail.com> wrote:
1) Why not ask the Dough Boys to do your heavy lifting? They developed this
strategy using 10 years of historical data. Ask them to run it over these 10
years for the Mar/Jun/Sep/Dec major SPY expirations for options with about
45 days until expiration.

2) Ask the Dough Boys why they only used a theoretical Monte Carlo
simulation for 2005 to generate their results. I'm retired, but I think it
is 2016.

3) What about the L in P/L? I see nothing about the losses that might have
occurred. How about the losses for the Sep 2001 strangles and straddles? And
likewise for the Sep 2008 strangles and straddles.

I don't know of any successful option traders that only sell options short.
But 91% probability of making a profit in all these straddles and strangles
at 50% of profit and 81% if held until expiration. I'm incredulous.

All the successful option traders I know trade spreads in which at least one
leg is long and has a reasonable delta or gamma relative to the short
option(s). They put time into models and analysis that identify option
spreads that have one leg that is cheap or correctly priced and the short
leg that is expensive.

What are three things that are short-lived?

1) Dogs that chase cars.
2) Basketball teams that can't free-throw.
3) Traders that sell naked options.

Best,

Frank
Chicago, IL

-----Original Message-----
From: R-SIG-Finance [mailto:r-sig-finance-bounces at r-project.org] On Behalf
Of David L. Van Brunt, Ph.D.
Sent: Thursday, December 22, 2016 9:57 PM
To: r-sig-finance at r-project.org
Subject: [R-SIG-Finance] probability of 50% profit on short options trade

Hello; I've been following the "dough" trading platform for a bit and they
are big on short options strategies such as strangles, straddles,
verticals, etc.  One nice thing their platform does is compute the
probability of reaching 50% of target (max) profit, and they recommend
taking profits at that point in time.

I was wondering if there is a way to do this in R... I know there is (monte
carlo, for example) but if there is a package or tool that has done some of
the heavy lifting already, it would save me re-inventing the wheel. The
motivation, of course, is that I'd like to pass many tickers into a script
that helps me find the best trading opportunities.  Their thinking is
described here: https://www.dough.com/blog/probability-of-50-profit-on-dough

Can anyone point me in the right direction to get started?

---------------------------------------
David L. Van Brunt, Ph.D.
mailto:dlvanbrunt at gmail.com
        [[alternative HTML version deleted]]

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